The 7 BEST Tax Write-Offs when Investing in Real Estate!

What's up you guys, it's Crypto Brand here. Just a prank! Don't unsubscribe, don't dislike, don't leave angry comments. Today, I want to talk about the seven best tax write-offs in real estate that you might not know about. So let's start here at the very beginning.

Owning real estate is a lot more than just having a property that spits out monthly profits. Instead, the tax advantages of real estate make it unique among almost every single other investment out there. When it comes to real estate, the return that you get every single month can be calculated in so many other ways besides the rent money you receive. Sometimes, just some of the tax write-offs allow you to make money every single month, but on paper, you're at a loss, and therefore it completely cancels out the tax obligation of owning that property.

So as requested from you guys, a lot and a lot and a lot, here are my top seven real estate tax advantages that make it a phenomenal investment. The first one is the mortgage interest write-off, and this is one of my favorite write-offs in real estate. Now, if you don't know what this is, let me explain.

Let's say you have a $500,000 mortgage on a property and you pay 4% interest per year. That means that you're paying $20,000 per year in interest. You can write that interest that you pay on your loan against either your own taxable income on a primary residence or against any rental income you receive. If you apply it to a principal residence, it looks like right now it's gonna be capped at the first seven hundred and fifty thousand dollars of a mortgage. If you have a rental property, it makes no difference if you have a two hundred thousand dollar mortgage or a five million dollar mortgage because that's an expense against your rental income, no matter what.

So, in our five hundred thousand dollar mortgage example, let's say on that property that you're grossing fifty thousand dollars per year in rent. You would then subtract the twenty thousand dollars you pay in interest, and your new gross amount on that property would now be thirty thousand dollars. This effectively lowers your mortgage interest rate by the amount that you would usually be taxed at.

In a primary residence, if you're paying twenty thousand dollars a year in mortgage interest and you're in a 25 percent tax bracket, this means that you can deduct that twenty thousand dollars off of whatever your income is and essentially you would save about five thousand dollars in taxes. If you're in a 25% tax bracket, this means that effectively, what you're really paying instead of 4% is really more like 3% per year, because it's a write-off.

Now, this is also a huge advantage of owning real estate and then leveraging your money on top of that. Like I said, even though this looks like it's gonna be capped at a seven hundred and fifty thousand dollar mortgage on a primary residence, when it comes to an investment property, it has no difference whatsoever. You can have as big of a mortgage as you want, and that’s still an expense against your rental income. This makes it even more appealing to own rental property because you get to deduct pretty much everything against that income.

This is also one of the reasons why you don't want to just buy a property in cash and keep it without having a loan against it. Having a loan against your property and leveraging your money in real estate is one of the unique reasons why real estate is such a good long-term investment. Leveraging your money in real estate is a lot different than doing it on margin in stocks or leveraging your money elsewhere.

In real estate, if you can lock yourself into a very long-term loan at a low interest rate, it almost always makes sense to leverage your money in real estate. When it comes to this, I did a video earlier in the year comparing stocks to real estate, and pretty much they were on par if you don't leverage your money in real estate, and then real estate came with all the headaches, like being a landlord and all these other things.

So, if you're not leveraging your money in real estate, you're almost better off just going with an index fund that would pretty much get you the same return minus all the headaches of being a landlord. But if you leverage your money, this is where you can get significantly higher returns than almost any other investment, maybe besides Bitcoin, which I didn’t buy in at ten thousand.

So the second write-off you have are property taxes. Now, this is something you can write off against your personal income or your rental income. If you're writing this off your personal income, right now, it looks like you can deduct up to ten thousand dollars of property tax per year. As an investment property, you can still deduct a hundred percent of your property taxes against your rental income.

That hasn't changed at all. So on our first example of the five hundred thousand dollar mortgage where you're paying twenty thousand dollars in interest, your property taxes might be another five thousand dollars per year. You would then deduct the twenty thousand dollars of mortgage interest and the five thousand dollars you pay in property taxes against the rental income. This will lower the amount of taxes that you pay on that rental income.

On a primary residence, deducting ten thousand dollars a year in property tax could end up saving you several thousand dollars a year in a tax write-off. This just effectively lowers the property tax rate that you would overall pay.

The third one, and this is a fun one, is depreciation. This is something where you can end up with money in your pocket every single month, but on paper, all of a sudden you're showing a loss and you pretty much will pay no taxes if you depreciate certain things at certain times in the right way. When it comes to investment property, you're able to depreciate the asset over a certain amount of time, generally it's twenty-seven and a half years, but certain things are able to be depreciated at higher rates than others.

For instance, you might be able to talk the cost of a brand-new kitchen over the course of ten years instead of the twenty-seven and a half years. This means if you spent $10,000 on a kitchen and you depreciated it over ten years, you could depreciate the cost of that by one thousand dollars per year against your rental income, and this tactic is known as cost segregation analysis.

Think of it this way: a car depreciates in value over time, and therefore when you have a car like this, sometimes you're able to depreciate the value if you're using it as an investment or for business—same with real estate. A kitchen is not going to last two hundred years; the house, chances are, is not going to last a hundred and fifty years. Therefore, we can assume that the property value is going to depreciate over time even though the land value might go up and even though the cost of materials might go up, even though the house might be worth way more ten or twenty years from now.

The thing is, the actual structure of the house isn't going to last forever; the kitchen is not going to last forever. So, we assume for tax purposes that all of these have a lifespan to them. We can assume maybe that these hardwood floors might have a lifespan of 20 years. Therefore, if you spend $10,000 doing all-new hardwood floors with a 20 year lifespan, we can depreciate that—let's just say five hundred dollars per year against your rental income—because at some point, this is going to be a new expense in terms of maintaining the property.

Sometimes people just deduct the entire cost of the property itself—land value—over the course of twenty-seven and a half years, so if you had a $275,000 house, for example, over twenty-seven and a half years, you can deduct ten thousand dollars per year from your rental income. This is just amazing for lowering your tax liability, especially when it comes to rental income.

I also recommend looking this up because it gets pretty complicated, and even I don't fully understand the complexities of this. Look up cost segregation analysis when it comes to rental property, especially if you've just done a big renovation or anything like that. Look into it; it could very well save you a ton of money just by looking into it and using cost segregation analysis.

However, just keep in mind that because you're depreciating the value of the property over so many years, it lowers your tax basis on the property. This means that if you bought, let's say, a hundred thousand dollar home and you depreciated it fifty thousand dollars, your new tax basis is fifty thousand dollars, but now the home is worth a hundred and fifty thousand dollars. Instead of just owing tax on the hundred thousand that you bought it at to the one hundred and fifty that it's worth now, because you depreciated it, your new tax basis is fifty thousand dollars.

If you sold it, you're gonna be taxed between the difference of your tax basis on the property and the new price that you sold it for. However, one of the great ways around this, and this is now my number four point, is the 1031 exchange.

So, a 1031 exchange means that you can sell an investment property and exchange it for a like property of similar or greater value. When you're doing this, you're not paying taxes on any profits, and instead, you're just deferring the taxes, putting it into the new property.

For example, here, let's say you bought a property for $200,000 and then you depreciated it a hundred thousand dollars over ten years. Your new tax basis on the property is a hundred thousand dollars, but let's just say now the house is worth five hundred thousand dollars. Keep in mind, it's a four hundred thousand dollar gain: you would have to pay taxes on the amount that you depreciated and the new value of the property. This would equate to a pretty significant amount of taxes.

But if you were to 1031 exchange that, you can sell it for the full five hundred thousand dollars, not pay any tax on that, and basically move your tax obligation to the new property with a new tax basis. By doing this, you're able to continually just defer the taxes you would owe, and you can continue doing one 1031 exchange after another, after another, after another, basically just using the taxes that you would have paid towards the new property.

You'll also pay taxes on your gains whenever you sell the property without 1031 exchanging it. So just keep this in mind: if you 1031 exchange for decades and then all of a sudden, thirty years down the line, you decide to sell that property, chances are you're gonna have a pretty big tax bill because you've been depreciating the property over so many years, the value has gone up over so many years, and the difference between your tax bases and the new value of the property is probably gonna be pretty significant.

But what most people end up doing is they just continually 1031 exchange one after another, just increasing the rent that they get, and this is how so many people can accumulate millions of dollars in real estate without ever paying capital gains taxes on their investment.

Keep in mind, by the way, this doesn't really apply to flips. If you're just going in flipping properties, typically, a 1031 exchange is for investment properties that are used as rentals. Now, on the subject of capital gains, consider this: as a primary residence, if you've lived in the home two of the last five years, you can sell the property for two hundred and fifty thousand dollars higher than your tax basis or higher than you bought it for without owing a dime in taxes.

This amount grows to five hundred thousand dollars if you're married. This means that you can buy a five hundred thousand dollar home, sell it two years later for seven hundred and fifty grand, and walk away without really owing any taxes on it. If you're married, you could sell that five hundred thousand dollar home for a million dollars.

Now, obviously, I'm simplifying things a lot here, but just to give you an example, this is a huge advantage of owning a primary residence long-term. If you sell that property any higher than the $250,000 of your single or five hundred thousand if you're married, it counts as long-term capital gains, which is taxed a lot lower than earned income.

Keep in mind, the long-term capital gains rate is a pretty low rate all things considered. So the next one that I mentioned in one of my previous videos is about the cash-out refinance. This is where you can pretty much borrow against the extra equity in your home, pulling it out completely tax-free, and then using that as a write-off against your rental income.

Now, this is technically a loan, and you do have to pay it back. You're only loaning against money you already have in the property, and by doing this, you're able to reinvest the proceeds and get an even larger return. Now, this gets a little bit more complicated when it comes to pulling out equity and refinancing a primary residence. I believe it's the first hundred thousand dollars can be used as a write-off for basically anything you want, and anything over that is not deductible unless you spend it back on your property.

But again, you'll have to look into this regarding the changing of all the real estate tax laws and all this sort of stuff, so I'm still looking into this. We'll see what this is going to be like when that passes for 2018. Overall, for a rental property, all the amount that you pull off is just a deduction against your rental income, and it's all used tax-free.

Now, number seven, when it comes to getting rental income, it's not taxed as self-employment income where you would have to pay FICA and self-employment tax. This means you could immediately save 15.3% by not paying self-employment tax. Ask me how I know, because I have to pay that as a real estate agent, and trust me, when you pay this, especially if you're ever 1099, it puts a huge dent in things.

Now, holding real estate, though, does not include this. Keep in mind, it also depends on how you structure your business. If you're holding real estate, by the way, in like a C-Corp or something like that, you may end up needing to pay the taxes. We've definitely talked with a tax consultant about this and how you're holding real estate because that will affect it.

Generally speaking, if you're holding it in your name or maybe an LLC or something that's not structured too differently, you're not going to pay that self-employment tax. Now, before I wrap this up, because I'm not a tax consultant by any means, this video is just meant to be an entry-level introduction to some of the tax write-offs available in real estate.

Please check with your CPA or accountant first because when it comes to taxes, a lot of this is so specific to the individual and whatever their unique situation is. It's not always that one plan will fit a hundred percent of the people. These are some of the tax write-offs that I have used myself that work for me, but again, what works for me might not always work for you or make the best sense in your situation.

So, like I said, please, before applying any of this, check with your own CPA or accountant to make sure this is best for you. So, as always, you guys, I hope you enjoyed this. Thank you so much for watching. If you haven't subscribed already, make sure to smash that subscribe button and also smash that notification bell really hard. Just keep smashing that button so YouTube sometimes notifies you when I post a video. They have been great about notifications lately. Thank you, YouTube. Win for the Graham Stefan channel!

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