Tax Benefits for Real Estate Investments
Real estate investment is a specific asset to diversify your client’s financial planning portfolio. Real estate investment is tangible and can seem less volatile than investing in stocks, these factors can make it a more attractive option and may be why from 1978-2004 real estate had an average return of 8.6 percent. Some of the most positive benefits of investing in real estate are in the tax advantages.
One of these tax benefits is depreciation, which means distributing the cost of the home over its lifespan. Even though rental prices will always go up, your property will depreciate over time, as with all tangible assets. This means you can claim this depreciation and this will maximize the client’s profit whenever they decide to sell. It is important to remember that land does not depreciate, just the structure.
Real estate investment can also be maximized through a 1031 exchange which will allow your client to be exempt from paying capital gains taxes if they reinvest the money into a similar property type.
According to an article on financialsamurai.com, “you can deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home. You can also sell your primary home for tax-free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for the last two of a five-year period. All expenses associated with managing your rental properties are also deductible towards your income. Income limits do apply however, so make sure you don’t make much more than $166,000 a year total.”
Because of depreciation and mortgage interest deductions (if you leverage your capital), your client’s real estate investment cash flow should be tax-free.
Ultimately, when it comes to financial planning and asset diversification, your client’s personality and preferences will be the main factor in determining what is right for them. To learn more about advising your clients on financial planning decisions, sign up for our webinar, Individual and Financial Planning Tax Camp (IFCP).