Tag: deductible

Tax Benefits of Real Estate- Deductibility, Depreciable, Deferability

One of the most exciting things about investing in real estate are the tax benefits that the government has given to real estate owners.  Before embarking on our real estate investing journey, I saw taxes just like my parents did: our duty as citizens of our country.  As our W2 income went up, so did the amount of taxes we paid every year.  At times, taking a minute to process the amount we paid in taxes was mind boggling.  In our case, my husband is working solely for Uncle Sam from January until April every year. What about you?

Three tax perks, known to many real estate investors as the 3Ds (coined by Gary Keller, the founder of Keller Williams Realty) are: deductibility, depreciable and deferability.

Deductible- the tax law allows many different deductions for the normal upkeep for a property.  These include deducting on basic expenses related to owning property: maintenance, improvements and even the interest on the mortgage, just to name a few.   As an investor, there is a whole array of sophisticated strategies that are available to legally tap into, for tax deductions.  Warren Buffet once said, ” You have to pay your taxes, but you don’t need to leave a tip.”

Depreciable- The tax law actually requires you to depreciate your property asset investments.  Property is presumed to be depreciating over a number of years and each year that tax is reported, you follow a schedule from the IRS, to factor in and calculate for that “wear and tear”.  Investors love this tax break because it allows them to reduce their taxable income through depreciation even though in reality, their property may be appreciating in value through appreciation!

Deferrable- one deferrable strategy is to do a 1031 exchange.  In selling an investment property, tax law allows sellers to defer their taxes from the capital gains of one investment, if they reinvest and purchase another property.  This has allowed many investors to realize the gain and reinvest it to acquire a bigger property (scale up) and defer the taxes. 1031 exchanges are a way investors have preserved their profits and accelerated their portfolio growth.

Knowing the 3Ds can change the way you see taxes.  It’s exciting to see how much in taxes you can save through real estate investing.  Imagine being able to take those savings and reinvest it to grow your portfolio!  This is how many have reached FIRE (financial independence, retire early) and you can too!  

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