It is important to understand the tax implications of owning real estate. Here is a list of four potential tax benefits of owning real estate:
- Capital Gains Treatment: Real estate held for investment purposes can qualify for capital gains treatment upon sale, which often results in a lower tax rate compared to ordinary income.
- Depreciation Deductions: Real estate investors can deduct depreciation on their properties, which reduces taxable income.
- Passive Activity Losses: Real estate activities are generally considered passive unless the taxpayer qualifies as a real estate professional. Passive activity losses can only be deducted against passive income
- Tax Shelters: Real estate investments can be structured as tax shelters, allowing investors to generate large deductible losses in the early years of the investment. These losses can offset other income, providing significant tax savings.