September 15, 2022
real estate investments tax implications

Real estate investments can be very complex, especially when it comes to tax reporting. However, there are general tax implications for common scenarios. Here, we will discuss some of these benefits. 

Real Estate Tax Write-Offs 

The most obvious tax implication for real estate investments are the write-offs that can help reduce rental income. Typically, you can deduct any expense directly related to managing and maintaining the property. This can include: 

  • Property insurance and taxes 
  • Mortgage insurance 
  • Property management expenses 
  • Expenses for maintenance and repairs 
  • Advertising fees 
  • Office space 
  • Equipment used for operating your real estate business 
  • Legal fees 
  • Travel expenses  

Accurate and detailed records should be kept in case the IRS requires substantiation. 

Real Estate Depreciation 

Like many physical assets, real estate investments assume normal wear and tear. You can deduct the cost of depreciation on your taxes each year, which will allow you to lower your tax liability. According to the IRS, the standard expected life of a property is 27.5 years for residential properties and 39 years for commercial properties. This means you can take the value of the property, less the value of the land it resides on, and divide it by the expected life term to calculate the amount of depreciation cost per year.  

Capital Gains 

Many real estate investors purchase properties with the expectations of eventually selling them later. Being aware of the tax implications that result from the sale of a property is just as important as those that result from owning one. A capital gains tax can have drastic effects on your tax liability. 

For example, you can realize a short-term capital gain if you earn a profit on an asset within a year of owning it. The gain is considered regular income. If the profit is large enough, it can move into the next tax bracket, creating a larger tax bill. 

On the other hand, you can realize a long-term capital gain if you earn a profit on the sale of property held for one year or more. These gains have much lower tax rates than standard income tax rates, which means you will get to keep more of the profit. Additionally, if your income is low enough, you may not be required to pay any taxes on the profit.  

Tax Help for Real Estate Investors 

It’s always best to get the advice of a reliable tax preparer or professional during tax time, especially if you have complex investments like real estate. Not knowing the correct way to report income, losses or deductions can result in IRS auditing, penalties and fees. If you need tax help, give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable agents. 

Analyze your IRS notice anytime with the Optima Tax App today.