Tax Advantages of Investing in Real Estate
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As we all know, taxes are something that have to be taken into account in any investment strategy. Real estate is no different, but there are some advantages to investing in property.
The stock market is the glamor investment platform in our country. The number of publications and shows devoted to its daily movements is rather staggering. That being said, almost none of them like to talk about taxes. Why? Regardless of how you trade in the stock market, you are going to pay a chunk of change in taxes and there is no real way around it. Real estate investing, however, is an entirely different story.
One of the benefits of real estate investing is you get to deduct your expenses. In truth, this is true for the stock market as well, but said expenses are nominal unless you are with a really expensive broker. The largest difference between the two markets is you get to deduct depreciation for real estate investments. It is deducted over 27.5 years and can save you a lot of money on your taxes over time.
The largest difference when it comes to tax advantages between real estate and taxes is the sale-buy situation. With stocks, you sell shares in one company and buy in another. When this occurs, you must pay taxes on the sold shares regardless of the fact you turned around and made another purchase. Real estate investments work differently.
With real estate, you can sell a property and buy another without paying taxes. Yes, even if we are talking about rental properties. This does not happen automatically like with your primary home. Instead, this is known as a 1031 exchange. 1031 exchanges involve the replacement of your property with a like-kind one. It is a highly technical area and should only be amended with advice from a lawyer and / or accountant. That being said, the tax savings are so large as to make it worth the time and expense.
Getting financing for rental properties is much harder than for a primary home. As a result, there is a significant amount of seller financing in real estate investment market. You can use this to your benefit from a tax perspective. When you go to sell your property, you can offer seller financing. This is known as an installment agreement. The benefit of this approach is you only have to pay taxes on your profits as they come in each year. This allows you to stretch the tax bill out and have more flexibility.
Real estate investing is fairly straightforward, but taxes are in issue you need to take into account. Make sure you have a tax strategy in place before buying and then apply it accordingly.