One of the best ways to build wealth, while saving money on your taxes is through real estate investing. Plus, it helps that there are so many available properties to fit any budget. Although, it is important to have a stable income and savings set aside for investing. As a result, you have the power to decide how much you want to pay for a property. Continue reading to learn more.
In real estate, you can claim a deduction based on depreciation. This is based on materials that break down and age. It goes without saying that real estate depreciates over time. According to the IRS, the deductible life of residential real estate is 27.5 years, while commercial real estate is 39 years. This also means you can deduct the value of your building over that length of time. This is also known as a "phantom deduction" since property values go up over time. To illustrate, if you buy a house for $100,000 and the house makes up 75 percent of the value, while the land makes up 25 percent, then you can divide $75,000 by 27.5 to get $2,727. Now, for the next 27.5 years, you can deduct $2,727 every year.
Increase Your Cash Flow
Through real estate investments, you can save money through pre-tax and after-tax positive cash flow. An after-tax positive cash flow is when expenses cost more than your income. A pre-tax positive cash flow is when expenses are less than income received. Yet, your tax breaks can ensure you receive more in income than you spend on expenses.
This is the IRS tax code, section 1031 that lets real estate investors sell properties and use the profits to buy a new one. And, you don't have to pay taxes until the next property is sold. You can continuously use another 1031 Exchange. Nonetheless, there are a few rules:
- The exchange must be for a like-kind asset
- You must identify a property to buy within 45 days and must close within 180 days
- You must have an intermediary hold on to the profit. Otherwise, you must pay taxes on any money you touch.
You can earn a nice chunk of change if you build up equity for real estate investments. When you have high equity, you can save money on your mortgage. You should set an equity goal. Then, once you reach your goal, you can sell the property and invest in a new one.
Before you invest in a property, it helps to research the inflation rates within your target location. You can see how much the homes have risen in value over the years. Inflation also benefits rental properties since you can raise rent even if your mortgage costs remain the same. As a result, you'll see an increase in your cash flow.
One of the best investments you can make is in real estate. You get to save on taxes, as well as increase your equity and cash flow. Since there is a wide range of properties available, what are you waiting for?