TAX BENEFITS OF REAL ESTATE INVESTING
In some of my previous videos, I've mentioned that one of the largest benefits of real estate investing is the tax savings. In this video, I'm going to dive a little bit deeper into the specifics of those tax savings and how to maximize your savings.
And the reason I harp on this is because in the end, it is not what you make, it is what you keep, I will keep harping on that. But that's the truth. So first and foremost, in your regular type of w two income, you are taxed at the max income tax bracket, you paid the most for that type of income.
Real Estate income is considered passive income, and it is, by default, taxed at a much lower rate. But then there are things you can do to decrease that tax even further. So, keep in mind, passive income, such as real estate is always taxed at a lower bracket to begin with.
One of the ways that you can reduce the taxes further is all the other things you can write off, and there's just a whole list of those, all your expenses, interest paid on your loans, and there's just a whole long list, I'm not going to get into all of those. But essentially, if you can think of it as an expense for that real estate business, you can probably write it off. But one of the biggest things is depreciation.
So real estate, for the most part is depreciated over 27 and a half years. So, the government basically has a rule or the IRS that states after that the useful life of average apartment building is 27 and a half years. So, each year, you get to write off a portion of the value of that property as though it's wearing away and that's going to be gone.
Now we all know that if you maintain the buildings, well, it's not going to be gone after 27 and a half years. But that's how it's treated under the tax law. So, you get to write that down, write that off, which means that you can often end up with a paper loss, even though you have a property that's producing income, and this loss can be applied to other income streams that you might have.
So that is huge. Now, if you're investing in a bigger property, a larger deal, perhaps you're doing this through a syndication as a passive investor. Sometimes you can take advantage of a cost segregation study. So, this was when an engineering firm comes in, and they say, hey, not everything in this building takes 27 half years to wear out, you know, this roof is only going to last 12 years, for example, this air conditioning system may be 10 years, and various things, okay, kitchen cabinets, everything. So, they will go through and look at every single item in there and assign it to category, this is five-year stuff, this is seven years stuff, and so on and so forth.
And you can there by depreciate those things faster, you cannot depreciate the land that is excluded. But all the other things can be depreciated on a faster schedule. Now, can take it even further, there is bonus depreciation available now, the rate has decreased somewhat was at 100%. It's gradually coming down every tax year, but it's still huge. So, you can apply for bonus depreciation through this, which means you get to collect all of that even sooner and apply it now to today's dollars, we know that today's dollars have higher value than future dollars, right.
So, we want to take as many write offs now as we can. So that's super, super huge. So again, paper losses, not real losses, but you can write them off your taxes that can get into the past through deductions, but basically think it's up to 20% of your qualified business income, can pass through the write off your other expenses. But talk to your true tax consultant professional about that I am not a tax expert. So please just take this as things to look into and not to legal tax advice. The other thing to keep in mind is long term capital gains tax.
When you sell a property, as long as you've kept it for more than a year, it can fall into long term capital gains. So, if you own a property like 11 months, and you're thinking about selling it, hold off one more month, because you want to get the long-term capital gains, which is much lower than short term capital gains, which is anything evil in less than 12 months. So, keep that in mind. And depending on the tax bracket you're in, sometimes you don't have to pay anything if it's long-term capital gains. If it's a personal home that you've lived in, within the last five years, there are ways to not pay anything on that even if it's been a rental property in the last year or two. So, look into those kinds of things.
There's also something called a 1031 like kind exchange, you can Google that and get all the specifics on it. But basically, what that allows is for you to take it Like a basis of that property, your tax bases that push it into next investment. So, if you sell one property and buy another, you can basically say, I'm not going to pay the taxes I would owe on the income I made from that property just yet, I've got push that into the next property. And what you can do is you can keep pushing basically, until you die. But it doesn't go on to your heirs, your heirs do not inherit that tax burden.
It basically resets when you pass away, so your heirs start off with a fresh basis. So that's something very powerful where you can basically keep pushing that to more and more and more expensive properties and keep scaling up without paying taxes. So, there's a less specific to 1031 Exchange, so you do need to look into it, consult your tax professional.
But those are some of the very valuable tax strategies in real estate and why real estate is such a great shelter for your wealth and how it can grow very rapidly. So, keep investing. If you have further questions, check out blue Vikings capital.com lots of resources there for you or hit me up with your questions.