What Tax Benefits Can I Get From My Investment Properties

Author: NCH Internal Editorial Team
Reviewed by Cort W. Christie, MBA
Cort W. Christie, MBA is the Founder of Nevada Corporate Headquarters (NCH) and a nationally recognized entrepreneur, executive, author, and speaker. Mr. Christie has spent over 32 years helping business owners structure, protect, and scale their companies.

This article has been reviewed by Mr. Christie to ensure accuracy and value for today’s entrepreneurs. Jump to...

Real estate properties are high-risk, high-reward investments that offer capital appreciation and rental income. They can help you make passive income and achieve long-term financial stability. But what most people don't know is that investing in properties also has major tax advantages.

From mortgage interest deductions to long-term capital gains, these tax benefits can significantly boost your overall returns, providing a compelling reason to invest in properties.

Below, we'll outline the various tax benefits you can get from investment properties and give you tips on how to make the most out of them.

Read on to discover the hidden gems of real estate investing and learn how to reduce your taxes.

Seven Tax Benefits of Having Investment Properties

There are seven primary tax benefits investment properties offer:

Operating Expenses Deductions

One of the biggest perks of having investment properties is the various tax write-offs you can claim. Rental property owners can deduct all the operating expenses for managing and maintaining their investment properties from their taxable income. Examples of this include:

• Property management fees.
• Maintenance and repair costs.
• Property taxes.
• Property insurance.
• Rental property owners/landlord liability insurance.
• Advertising costs.
• Office space rental.
• Business equipment costs.
• Legal and accounting fees.

All these write-offs will help you effectively reduce your taxable income. However, to claim them, you must maintain detailed records. Your receipts will help prove the deductions you've claimed should the Internal Revenue Service (IRS) decide to audit your real estate business.

Mortgage Interest Deductions

Aside from operating expenses, you can deduct any mortgage interest paid for your investment properties from your tax bill. If you used a business loan to finance your investment property, the interest paid for that loan is tax-deductible.

Mortgage interest deductions are especially helpful during the first few months of your loan when interest payments are at their highest. We suggest you keep track of all your mortgage interest payments to make the most of this tax benefit.

Depreciation Deductions

Another major tax benefit you can get from investment properties is depreciation deductions. Over time, the value of your residential rental property will depreciate due to wear and tear, but the good news is you can deduct the cost from your taxes.

The IRS allows rental property owners to deduct a portion of their investment's cost for over 27.5 years for residential properties and 39 years for commercial properties. For example, if your rental home is valued at $300,000, you can deduct up to $10,909 in depreciation for 27.5 years.

However, it's important to note that there are limitations to this write-off. If you decide to sell your residential rental property later and someone buys it for higher than its depreciated value, you must pay the standard income tax rate on the deductions you've claimed.

This requirement is called depreciation recapture, a tax provision that requires real estate investors to pay taxes on the depreciation deductions they've filed. The rate for depreciation recapture is relatively higher than the average capital gains rate.

Is there a way to avoid this requirement? Yes, but we'll discuss these strategies later on.

Capital Gains

Capital gains refer to the profit you make when you sell an investment property. Two types of capital gains, short-term and long-term, have different tax implications. These are the following:

• Short-term Capital Gains: If you sell your investment property within a year of owning it, you will receive short-term capital gains. This type of capital gain is taxed between 10% and 37%, the same tax rate imposed on ordinary income.
• Long-term Capital Gain: You can make long-term capital gains if you hold onto your investment property for over a year. Long-term gains are taxed at a lower rate than short-term gains.

Ultimately, the longer you wait to sell your residential rental property, the lower your capital gain taxes will be.

Tax-deferred Incentive Programs

There are two incentive programs designated for real estate investors like you:

• 1031 Exchange: The 1031 exchange is a powerful tax-deferral strategy in which you avoid depreciation recapture by reinvesting the capital gains you received from one investment to another qualified property.
• Opportunity Zones: The 2017 Tax Cuts and Jobs Act (TCJA) created the Opportunity Zone Program to encourage real estate investors to invest in improving low-income areas nationwide. If you place some of your capital gains into a Qualified Opportunity Fund, you may be able to defer paying capital gains until 2026 or for as long as you hold onto your stake in the fund.

The mechanics of these two programs can be complicated. So, before you employ them as tax-saving strategies, we suggest you consult a tax professional first.

Pass-through Deduction

Any real estate investor who invests in properties through partnerships or LLCs can claim pass-through deductions. This tax break allows you to deduct up to 20% of your Qualified Business Income (QBI) from your taxable income.

This benefit and other programs included in the 2017 TCJA will expire by December 31, 2025. So, we suggest you claim this write-off as soon as possible.

Payroll Tax Exemption

Self-employed people are typically required to pay the FICA tax, also known as the payroll tax, which covers Social Security and Medicare taxes.

This tax type is typically divided between the employee and the employer, but since they don't have withholding taxes, they must pay both portions themselves. However, if they own any rental properties, the income they generate from them is not subject to FICA taxes.

Importance of Getting Expert Advice From A Professional

While some of these tax benefits seem relatively straightforward, it is better to consult a tax professional before you claim them.

Tax laws can be complicated and subject to change. Some of the deductions we've mentioned will no longer be available by the end of 2025. So, to avoid making costly mistakes, we suggest working with a tax professional.

These experts will help you stay current with the latest changes in tax laws and provide insights on maximizing the tax benefits of your investment property. They may also assist you in filing your tax returns, ensuring they’re accurate and filed on time.

Maximize Your Investments With The Help of An Expert

Start tax planning today with NCH's help! Our team of experienced tax professionals will help you take full advantage of all the deductions and incentive programs available to real estate investors.

From understanding complicated tax laws to identifying hidden saving opportunities, we will help you reduce your tax liabilities and keep more of your hard-earned profits.

Visit our website here to learn more, or call us at 1-800-508-1729 to schedule a free consultation with one of our tax professionals.

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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