Real estate investments in the US are one of the most lucrative avenues to build wealth and draw long-term returns, sometimes, lasting generations. Moreover, the ever increasing demand for affordable housing and office space in Dallas and other parts of the US makes the investment even more lucrative. Though real estate investing in Dallas, TX is profitable, every profitable endeavor comes with a little baggage in the form of “taxes.” Real estate investors are required to pay taxes on their income producing properties and total annual income. There is, however, a legal way to avoid these tax liabilities. Having said that, the blog post discusses four strategies that provide unique tax benefits to real estate investors.
Every piece of commercial real estate is a tangible asset, whose physical health can depreciate over time. To make up for such wear and tear, the Internal Revenue Code offers an annual depreciation allowance that real estate investors can use to offset a substantial part of their tax bills. According to the Internal Revenue Services, the deductible life of commercial real estate is 39 years, which essentially means real estate owners get rebates on a specific amount in their tax bills for 39 years. The depreciated value that is treated as “tax-free” is calculated through a method called Modified Accelerated Cost Recovery System. Though real estate depreciation may sound like a loss proposition for investors; it keeps hefty tax bills at bay, and the actual market value of real estate may continue to rise irrespective of degradation.
2. 1031 Exchanges
The 1031 exchange is another legal method approved by the IRS that helps real estate investors defer taxes by selling a property and using the equity to invest in a second property, with either equal or greater value. Any real estate investor can sell one of their existing real estate properties and use that profit to secure another real estate property and save on taxes. The question remains, ‘how does this method actually help with taxes?’ To answer, until the investor sells the second property, they will get a complete tax waiver. This IRS code allows for lucrative avenues to increase the value of these investments without paying huge sums in taxes. The IRS requires real estate investors to identify a prospective property within 45 days and close the deal within 180 days to avail tax benefits under this specific program.
Though many investors may need to take out a loan or mortgage to fund a real estate purchase, refinancing can help real estate investors write off the loan and simultaneously defer some of taxes due to the IRS. When investors go for real estate investments in Dallas, the equity obtained through refinancing can be used to boost the property’s value through cosmetic improvements or can even be used for additional investments. In typical scenarios, real estate investors who have no difficulty in refinancing may get a loan that is either 80 percent of combined loan to value or 50 percent of the fair market value of the property. Though you are required to pay taxes when selling the property, no taxes will be levied on the refinanced loan amount, for the time being. On top of that, you can use the money for more real estate investments or other purposes to save on interests and reduce tax bills.
The Bottom Line
Real estate is one of the perennial income sources that promise long-term tangible and intangible benefits. Before going for real estate investments in Dallas, investors should study existing market conditions before putting their money on the table. Figtree Capital Ventures has a team of experts to assist investors at every step of the way in real estate acquisitions. To learn more about our real estate investment approach and investment services, fill out our contact form or call us at 866-304-9194.