Real Estate Tax Benefits

Disclaimer: I am not a CPA.  Please consult one if you’re looking for professional advice.
 

You may have heard generally about the tax benefits of real estate, but what exactly are the benefits?  Why invest in this asset class?

Write-Offs

1. Depreciation

When you buy real estate, the biggest benefit, in my opinion, is the ability to depreciate the asset.  While the property gains market value, in the government’s eyes, the property is losing value.  That allows you to write off a portion of the home’s value (original purchase divided by 27.5) every year for 27.5 years.  This means, if a home is work 275k and rents for 20k/year, you don’t have to pay taxes on half of your rental income just from depreciation.

2. Property taxes

Another expense you’re allowed to take is the property taxes that you pay.

3. Mortgage interest

Another reason to use leverage: the interest from the loan is tax-deductible.  That means you not only get to benefit from a juiced return that comes when you decrease your initial investment capital, but you also get to save more of the money you earn through the venture

4. Insurance

Yes, homeowners insurance can be expensed as well.

5. HOA fees

If you live in a community with an HOA, there are multiple benefits: they typically take care of certain exterior maintenance and repairs for you, they cover certain insurances that means you don’t have to pay as much yourself, the covenants that generally preserve home values in the community, and you also get to deduct the cost from your taxes.

6. Property Management Fees

If you want to hire someone to make your investment more passive, you also get to deduct the cost of their services from your taxes.

At the end of the day, you typically don’t end up paying any taxes on the rent you receive from a rental property.  Strategies that produce more income may generate enough cash to require you to pay taxes, but the situation that real estate enjoys is much better than most other asset classes in this regard.
 

Bonus Depreciation

Another way to increase your write-offs is through bonus depreciation.  If you’re employing a strategy that produces more cashflow than your rental’s expenses and standard depreciation can cover, you can take advantage of something called bonus depreciation, which is currently phasing out as of my writing this in March 2025, but the concept remains.

To take advantage of bonus depreciation, you first need to get a cost segregation report done on your property – this is typically done on commercial property, but it can be done on residential as well.  An engineer will write up a report based on the facts of your property that divides up the parts of the property into the different depreciation schedules each item should fit into.  For instance, the floors of a home can be depreciated over a quicker timeline than the standard 27.5 year schedule for residential property.  When you go to calculate your depreciation in the earlier years of your ownership of the property, you’ll find that by doing a cost segregation study, you’re able to accelerate more depreciation into those early years, wiping out more of your income.

It’s also important to note that if you have more losses than profits, you get to roll those losses into later years, so it doesn’t hurt to have extra depreciation applied to your properties in the early years.
 

1031 Exchange

If you ever sell the home, you will recapture the gain and pay taxes on it unless you perform what’s called a 1031 exchange.

There is a section of the IRS tax code that allows investors to roll their equity from one investment property to another without paying capital gains taxes on the sale of the relinquished property if they meet certain requirements and a specific timeline.  This can be a huge benefit to the investor as it allows them to continue compounding growth on a larger amount of money rather than taking tax losses each time they trade up.

There are other, more complex real estate tax-saving strategies that I have yet to dive into, but this baseline knowledge should take the average investor from a capital growth mindset and add a capital preservation element that will synergistically affect their portfolio’s growth.  There are so many aspects to real estate investing that make it fun for me, and the tax-saving aspect is one of them.

Another fun fact - REPS: Did you know that real estate professionals have an additional way of saving on taxes?  People in the real estate industry benefit from being able to apply passive losses to active income through an election called Real Estate Professional Status (REPS).  This allows you to take those passive losses from depreciation that I mentioned and flow it over to what's called "active income" - your W-2 or 1099 or your spouse’s W-2 or 1099 income are the most common.  Qualifying as a real estate professional can have significant implications for your end-of-year taxes.

If you have any other questions, I’m happy to help as much as I can, but you should also consider consulting a certified professional accountant with a background in real estate.  Not all accountants are created equal, so make sure to get a recommendation, check up on their credentials, and read their online reviews before committing to use one.