Tax Tips

tax-form-being-filled-outThere can be several tax advantages to investing in real estate. The following are a few of them.  Please do not attempt to apply these tips to your specific situation, unless you discuss them with a tax professional you can trust.

Primary Homes
There can be several investment advantages to investing in a primary residence.  First of all, the interest and real estate taxes you pay can be deductible on your income tax return, if you itemize your deductions.  If you operate a business from your home, talk with your tax professional about taking a home office deduction.

Also, there are no capital gains on the sale of your primary residence, up to $250,000 for an individual and $500,000 for a couple, if you have lived in the home for at least two of the last five years prior to the sale.  This capital gains exemption is not a one time exemption, but can now be used multiple times.

Use Retirement Account Funds to Purchase Investment Real Estate: 
Did you know that individuals can set up a Self-Directed Retirement Account, such as a Regular or Roth IRA, or SEP and invest in real estate?  Several reputable companies provide custodian services for your retirement funds where you can make alternative investments like real estate, and mortgage notes.  To qualify, the purchase must be for “investment purposes”.

These accounts offer you greater diversification for your savings portfolio and also provide another source of capital for real estate investments.  They give you the opportunity to fund your future with profits from investments in a tax-free or tax-deferred environment.  

When using self-directed retirement assets to invest in real estate, consult an accountant or financial adviser familiar with these transactions, as there are restrictions to be aware of. To find a list of companies, search self-directed IRA custodians, or contact your Birchland Realty agent for a list.  Give yourself more investment choices!

Tax Shelter
Owners of improved properties purchased for the production of income are allowed depreciation deductions for assets (other than vacant land) which can be used to reduce your tax liability, thereby sheltering some of your income from taxation.

Tax Deferred Exchanges of Investment Property
Section 1031 of the Internal Revenue Code allows certain transactions involving business and investment properties to qualify as a tax deferred exchange.  If you intend to sell a property held primarily for investment or business purposes and intend to reinvest in another business or investment, talk with a tax professional about how you may delay or avoid capital gain taxes on the sale.  The plan must be initiated before the first transaction closes.  Be informed and save!