Successful Real Estate Investment: Common Tax Exemptions

August 5, 2023by admin4

As long as there is land, there is Real Estate Investment. It can easily be considered as one of the longest on-going profession that leads to earn money quickly. Moreover, it can be a smart financial move, especially when taking advantage of tax considerations.


What is meant by Real Estate Investments?

Real estate investment is purchasing of properties prioritized as an investment rather than as a primary residence intending to generate income. These types of investments use real estate properties as an investing medium. Investment in real estate yields significant returns and has the capability to create generational wealth if invested wisely.


Who is a real estate investor?

A real estate investor is one who buys property, with an intention to sell or rent it out. As this type of investment may require high capital initially, some investors don’t own the properties but act as the mediator and on behalf of others they buy and sell the property.

There are majorly three types of real estate investors:

  • Wholesalers

The investors who buy property at a discounted rate and sell it for a higher one.

  • House flippers

They are the ones who purchases a property, fix it up and resale it at good prices.

  • Landlords

They are those investors who rent out the property to tenants.


Tax redemption for investing in real estate?

There are many leverages of investing in Real Estate but one of the mainstream benefiter among all is tax redemptions by the government.


1. Deductible Expenses

Costs incurred by Real Estate investors is called deductible expenses that can be claimed during filing the taxes which clearly tells there won’t be any need for paying taxes on this expense, as homeowners can take advantage of access to additional tax redemption when they invest with their main residence. Real estate investments depend on your property ownership and business dealings include:

  • Mortgage Interest
  • Property tax
  • Property insurance
  • Property management fees
  • Building maintenance and repairs
  • Qualified business expenses


2. Depreciation 

The practice of Depreciation helps to manage at the time of wear, tear and degradation that occur on a property. It helps real estate investors to deduce the taxes on rent properties, which suffers negative effect of usage over a long period. While selling your property, be aware of a practice known as depreciation recapture. When depreciation is applied to a property, it lowers the cost basis in the investment holding.


3. Passive Income And Pass-Through Deduction

Per the QBI, 20% deduction on income can be received from business entities such as partnerships, sole proprietorships, S-corporations and limited liability companies (LLCs) under pass-through deductions. A good example of this is qualified rental income.

This tax refers to, whenever you sell an asset that grows in value, taxes may required to be paid on the gained profits accrued by the investment. The  properties that come under this category are:

  • Single family homes
  • Multi family residences
  • Apartments
  • Condo buildings


4. Capital Gain Tax

Capital gains tax is applied to appreciation on your investments, but it can differ depending on how much your earnings are, how long have you owned the asset and your tax filing status.


5. Incentive Programs

Depending on how Real Estate Investors structure their property ownership and portfolio of holdings, they may also be eligible to acquire leverages of various tax incentive programs. Programs allow them to recognize added tax savings on qualifying investments and income, but with limited eligibility.


6. 1031 Exchange

It allows to sell one business or investment property and purchase another without subjecting to capital gains taxes. However, the exchange process must be completed and conducted as per IRS rules. The new property must be having the same nature as the original and of equal or greater value than the old property that has been sold.


7. Self-Employment FICA Tax

Income earned from rented properties is taxable to some extent under standard income guidelines, it isn’t subject to FICA taxes.


These are some of the common points across globe which can help you avail tax benefits while investing in real estate investment. However, certain rules keep on changing basis the state and the country. It may get difficult to understand the criteria of tax redemption processes, and this is where the role of an expert comes into play. Mercurius is one such expert you can rely on. Having an expert can help you comply with the terms and conditions and provide you with the appropriate legal information.

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Written by – Aniket Tyagi


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  • kanchan

    August 18, 2023 at 1:36 pm

    Informative and well explained


    • MAS Editorial Team

      August 22, 2023 at 10:44 am

      Thank you


  • Kartikey Bansal

    August 18, 2023 at 2:34 pm

    This blog is really informative for someone learning about real estate accounting.


    • MAS Editorial Team

      August 22, 2023 at 10:45 am

      Glad you found it useful.


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