Real estate, known for stability and wealth-building, offers unique tax benefits alongside appreciation, debt paydown, and cash flow. While tax savings shouldn't drive investments solely, they enhance the appeal of real estate. Key strategies include:
1. Depreciation Magic:
- Depreciation, a non-cash expense, reduces taxable income based on the asset's purchase price.
- Illustration: With depreciation, even with positive net operating income, you can report a net taxable loss, reducing or eliminating tax liability.
2. Advanced Strategies:
- REPS (Real Estate Professional Status):
- Involves 750+ hours and over half your time in real property trade.
- Material participation in long-term rental properties.
- STR (Short-Term Rental) Strategy:
- Requires short guest stays and material participation in short-term rental properties.
3. Cost Segregation Studies:
- Breaks down building components for faster depreciation.
- About 20-30% of building reclassified, eligible for bonus depreciation.
- Significantly boosts first-year tax savings.
4. 1031 Exchanges:
- Sell and reinvest proceeds in a new property to defer capital gains taxes.
- 45-day identification window and 180-day closing period.
- Utilize a qualified intermediary (QI) to avoid touching proceeds.
5. Deferred Gains:
- Reinvest gains for compounded growth.
- Potential for heirs to receive properties with a step-up in basis, eliminating tax liability.
Conclusion: Real estate investment, coupled with smart tax planning, offers a diverse set of strategies from basic depreciation to advanced techniques like REPS, STR, cost segregation, and 1031 exchanges. These not only enhance financial gains but can create a tax-efficient path to wealth creation.
For detailed insights, read the full article here.
source: thestreet.com
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