5 tax advantages for real estate investors


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Investing in single-family residential real estate offers multiple ways to increase wealth, from cash flow from rental income, to appreciation from an increase in a home’s value, to leveraging borrowed money to boost returns, to building a portfolio of properties to act as a hedge against inflation.


Saving on taxes is a bonus as well.


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A savvy investor can use a number of different strategies to ease their tax burden. Some sections of the tax code are geared toward encouraging improvements and will reward a property investor who makes improvements.


Some of these strategies are outlined below, and because of the complex nature of the tax code, investors are encouraged to consult with a tax professional or other adviser to make sure they follow the law correctly.


31 tax deductions real estate investors need to know

Most property owners are aware that they can write off costs like mortgage interest, insurance, and ordinary maintenance and repairs. But there are many other tax deductions related to managing and improving a rental property that owners can take advantage of.

Mynd has compiled a list of 31 tax deductions that are sometimes overlooked by property owners. Here are 10 to be aware of:

1. Business startup costs

Those who are just starting their rental property business might be able to deduct a portion of their startup costs, such as:

  • Accounting fees
  • The study of potential markets
  • Training for new employees and salaries
  • Office equipment and furniture

2. Costs incurred while looking for new property

The costs of hotel, airfare, rental car, meals, and other travel expenses incurred while looking for a new rental property are tax-deductible if they are ordinary and necessary.


To qualify, at least half of the time spent away on travel must be spent on doing business, and the primary reason for travel must be business. This means investors can get a tax break for a long weekend in Florida as long as they spend the majority of time engaging in business-related activities.

3. Ordinary and necessary advertising expenses

Property owners can write off any costs incurred while advertising their business and/or a rental unit. Typical expenses include classified ads, signs, and postage for mailers. The cost of building a new website is deductible as well.

4.  Internet and cell phone plans

Property owners who use their internet and cell phone for business purposes can deduct the percentage they spend on their business. It may be challenging to separate personal and business usage, but the key is to be reasonable and consistent and keep records.

5. Suspended passive losses

Real estate professionals can write off rental loss and business losses against any income they earn. That includes income lost to unpaid rent. Until 2025, there’s a cap of $250,000 if they are single and $500,000 if they are married filing jointly. That cap goes away after 2025.

Rental property losses that aren’t deducted right away are called suspended passive losses. These losses are carried forward indefinitely until one of two things happens:

  • The owner has passive income (from a rental home or otherwise) to deduct again
  • The owner sells or transfers the property

6. Utilities paid by the owner

Property owners often pay for common area lighting and security systems. But they can also write off expenses like heating, water, sewer, gas, trash collection, cable, and internet.

The costs of utilities used by tenants are fully deductible, even if the renter reimburses the owner later, though those reimbursements must be claimed as income.

7. HOA dues

Investors who belong to a Homeowners Association have to pay dues. Since they’re a necessary expense, that makes them deductible against rental income.

8. Legal fees for an eviction

Legal fees are usually incurred as part of the costs of an eviction. Court fees and legal fees are deductible.

9. Expenses paid by tenant

Any fee that a property owner would pay if he lived in the property that is covered by a tenant’s rent payment is known as an expense paid by tenant. Investors can easily stipulate which fees they may be by using a free rental agreement template.

For example, a tenant might cover their own HOA dues, which would be deducted from their monthly rent. It’s key to remember that:

  • Expenses paid by the tenant count as rental income since the owner would be making those payments otherwise, and
  • The expenses have to be themselves deductible, like water or sewage

10. Energy efficiency

Real estate investors who upgrade their property to be more energy-efficient might qualify for a partial deduction. For example, replacing a 10-year-old HVAC or a 15-year-old water heater may qualify.

Brian Boucher

How to take depreciation and save on taxes

Depreciation allows property owners to recover some costs of an income-producing property, which the IRS estimates has an average lifespan of 27.5 years. Once a property is put into use, owners are permitted an annual deduction of 3.636 percent of the total cost of the property.


To qualify for depreciation, a property must meet all the following requirements, according to the IRS:

  • The individual filing taxes must personally own the investment property.
  • The individual filing taxes must use the residential property in their business or income-producing activity (such as collecting rent).
  • The property has a determinable useful life.
  • The property is expected to last more than 1 year.

Depreciation is also relevant to a residential property’s general maintenance and improvements. While maintenance and improvements are similar, they have different definitions regarding the tax allowance for rental property owners.


Maintenance is a repair, meaning it returns the property to its original condition. For example, patching up a hole in a roof would be maintenance while replacing the roof would be considered an improvement. In general, improvements add to the overall property value.

Rental home owners can write off many expenses in addition to factoring depreciation into their taxes. Aside from annual depreciation, there are some tax deductions that are available to rental property owners.

Rachel Benaim-Abudarham

Bonus depreciation vs. section 179 write offs

Bonus depreciation and Section 179 are two tools real estate investors can use to immediately deduct expenses that normally would have to be spread over a number of years.


Using bonus depreciation, a business takes the writeoff for the cost of an asset immediately. It applies only to improvements that have a “useful life” of 20 years or less (useful life being the amount of time the IRS has determined an item can be used as part of a business’s operation).

For real estate investors, this applies to capital improvements to a property.

Bonus depreciation is being phased out

The Tax Cuts and Jobs Act (2017) made significant changes to the rules on this deduction. It doubled the bonus depreciation deduction for qualified property from 50 to 100 percent. It also allowed used property to qualify for the first time.


Bonus depreciation will decrease by 20 percent per year beginning in 2023, so the 2022 tax year is the last one with 100 percent depreciation, and the benefit phases out at the end of 2026.


Bonus depreciation is calculated by multiplying the bonus depreciation rate (currently 100 percent) by the cost of the asset. For example, assuming a 21 percent tax rate, a business claiming bonus depreciation on an asset that cost $100,000 would deduct $21,000.

This strategy can be used to create a net loss.

How does Section 179 work?

Section 179 also permits speedier deductions than standard depreciation, but it allows greater flexibility. Investors who use it can deduct an amount of their choosing, and they can allocate the deduction among assets as they choose. This way, they can save some depreciation for future years.


Section 179 is especially beneficial for small companies, like retail real estate investors.

The deduction applies to assets like cars, office equipment, business machinery, and computers. As of 2022, the deduction is capped at $1,080,000, and the spending cap is $2,700,000.


To qualify, the purchased items must be in use for business purposes more than 50 percent of the time.

Businesses may be able to avail themselves of both bonus depreciation and Section 179 deductions. If investors do use both, the IRS requires them to use Section 179 before bonus depreciation.


Whereas bonus depreciation can be used even if a business isn’t profitable, a Section 179 deduction requires profitability. A business cannot take a deduction greater than its own profits. So, if a business makes $20,000 and the improvement costs $30,000, the owner can apply Section 179 to only $20,000.


Brian Boucher

What is the 20% Qualified Business income deduction?

A tax professional or an experienced property manager can help investors to avail themselves of the qualified business income deduction (QBI), which was introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017.


Also known as the Section 199A deduction or the 20 percent pass-through deduction, the QBI deduction lets owners of so-called pass-through businesses deduct up to 20 percent of the income from a qualified trade or business if the owners meet certain thresholds.


Figuring out if an investor qualifies for the QBI deduction is no simple matter, because the proposed regulations rest on a tax law question that doesn’t have a definitive answer: Is owning rent-generating property a business or an investment? Rather than directly answering this question, the IRS provides a set of criteria to qualify for the deduction.

What are the requirements to qualify for QBI?

There are four main requirements to qualify for the QBI deduction.

  1. Investors must make sure to have separate records for their investment properties.
  2. If they have owned the home for less than 4 years, they must document that they have spent 250 hours on rental services, which can include, for example, speaking to tenants, doing maintenance, or screening renters. If they have owned the home for more than 4 years, they must show that they have spent 250 hours on rental services in 3 of the 5 consecutive years.
  3. They must maintain time logs to show how those 250 hours were spent.
  4. All documents demonstrating the above must be attached to each tax return.

Not all income qualifies. QBI excludes:

  • Dividends
  • Interest income
  • Capital gains/losses
  • Income earned outside the U.S.
  • Certain wage and guaranteed payments made to partners and shareholders.

How to meet the QBI criteria

Meeting these criteria means that the individual(s) or entity puts in enough of a particular type of work to qualify for the QBI deduction.

“It’s tricky,” says Thomas Stepp, Mynd’s head of investor offerings, “and that’s coming from someone who’s been in this space for a long time. I don’t think the QBI is clear to anyone but an accountant, and if you asked three different accountants about the same scenario, you would probably get three different answers.”


The law also requires those who want to take this deduction to spend a good amount of time running their business, so it may be most applicable for investors with a large portfolio that they self-manage.


“You can definitely qualify, but they make it like dragging yourself across glass to get it,” says Stepp, “so the time invested may outweigh the savings returned.”

Given how complicated the QBI deduction is, it is prudent to consult with a real estate tax professional. Mynd’s property management services can be helpful because of how accurately they can document the work it takes to maintain rental properties.


Brian Boucher

What investors need to know about 1031 exchanges

A byzantine world of tax rules awaits investors when it comes to selling properties. But sticking to the basics of one popular tool to maximize profits and avoid capital gains taxes has proved to be one of the best bets for building foundational real estate wealth.

It’s called a 1031 exchange. And it’s a tax-deferring transaction that can be used in just about any property portfolio.

What is a 1031 exchange?

A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows an investor to avoid paying capital gains taxes on the sale of an investment property, as long the proceeds are reinvested within certain time limits.

1031 exchange rules and regulations

1031 exchange works as a tax-saving mechanism in a variety of ways:

  • It is a swap of properties that are held for business or investment purposes. (Houses that are flipped do not qualify.)
  • If used correctly, there is no limit on how many times or how frequently an investor can execute a 1031 exchange.
  • The rules can apply to a former primary residence under very specific conditions.

Requirements to qualify for the tax break

It’s necessary to exchange one rental for another rental. An investor cannot use the 1031 exchange to sell a rental home and then buy a piece of land that isn’t attached to income. And after the sale of a rental property, a 1031 exchange cannot be executed to purchase a vacation home.


The qualified intermediary, who holds the escrow exchange fund, plays an important role in this process. If an investor touches any of the money made when a property is sold, the transaction is immediately subject to taxes. Spending the money or moving it into an investor’s account would incur penalties; such actions void the 1031 exchange.

A section 121 exclusion can save even more

Thanks to Section 121 of the Internal Revenue Code, the taxpayer is entitled to a $250,000 (if single) or $500,000 (if married filing jointly) exclusion on the sale of any property they own and have used as a primary residence (also known as a “principal residence”) for 24 out of the last 60 months.

With an exclusion, it isn’t necessary to pay taxes or reinvest. These 24 months also don’t have to be spent consecutively.

Like a 1031 exchange, it’s prudent to consult with a real estate professional before performing a Section 121 exclusion to make sure it is done correctly.

There are several ways in which the 1031 exchange and a Section 121 exclusion can complement one another. Here’s an example.

  • An investor buys a property and lives in it for two years. Then she moves out and
  • The property is kept as an investment for 18 months.
  • When the rental property is sold, an investor can use the Section 121 exclusion and the tax deferrals from the 1031 exchange.

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This article originally appeared on Mynd.co and was syndicated by MediaFeed.org.

Can real estate help you retire early?


While people have been retiring early since there was work to shirk, the “FIRE movement” went mainstream in the early 2010s, popularized by Mr. Money Mustache and a few other bloggers.


But does financial independence necessarily mean retiring early? How do you achieve financial freedom? And what hidden pros and cons of FIRE are you probably overlooking?


Here’s your 30,000-foot view of financial independence and early retirement, plus a formula to achieve it.




FIRE is an acronym for financial independence/retire early, or alternately financial independence/early retirement.


But those actually represent two distinct concepts. Early retirement refers to quitting your career job, never to return to the workforce. Or at least not to a high-stress, high-income career.


Increasingly, some retirees blur the line and continue working a fun job either full- or part-time. But more on that later.


Deposit Photos


Financial independence, sometimes called financial freedom, means being able to cover your living expenses with passive income from investments. In other words, your day job becomes optional, and you no longer need to trade time for money.

For example, say you live on $4,000 per month.


You buy a rental property that generates you $500/month in rental cash flow. You like seeing that extra $500/month come in, so you buy another property, and then another. When you have $4,000 of rental cash flow coming in each month, you can live on the rents alone. You could quit your job in a blaze of glory if you liked.


Note that the term “financial independence” has two different meanings, depending on the context. Aside from the financial freedom definition, it sometimes also means the ability to pay your own bills as an independent adult. Thus, a stoner 24-year-old who spends his days playing video games in his parents’ basement and barely working is not financially independent in either sense.


Julia_Sudnitskaya / istockphoto


You get the gist: with enough passive income, you can pay your bills and stop working if you want.


But what should you invest in to reach financial independence and retire early? How much of a nest egg do you need?


Honestly, these are the easy parts of financial independence and early retirement. Easy enough that I can explain them in a few paragraphs.


The hard part is maintaining low living expenses and a high savings rate, month in and month out.




As outlined above, you can invest in rental properties to generate passive income. And in doing so, you can bend, if not break entirely, the 4% Rule (more on that momentarily).


But as much as we love rental income around here at SparkRental, it’s far from the only type of passive income. You can earn passive streams of income from stock dividends, bonds, real estate crowdfunding investments, and countless other sources.

Rather than trying to pile all your money into one asset class, and earning all your passive income in one way, aim to create many passive streams of income.


For example, I earn money from rents, but also from stock dividends, real estate crowdfunding investments, private notes I’ve lent, and from businesses I own. No one source of my income would blow your mind, but they add up.


If you’re new to investing, I recommend starting with stock investing through a robo-advisor like Acorns or SoFi Invest. It requires no skill on your part, you can automate it, and you can start building an investment portfolio with $10.


When you’re ready for the next step of diversification, add a real estate crowdfunding platform like Fundrise or Groundfloor. It’s equally easy and passive, no expertise or work required.


Only consider buying your first rental property when you’re ready to pick up a new set of skills, and to devote lots of hours to it outside of your day job.


1989_s/ istockphoto


As outlined above, financial independence requires covering your living expenses with passive income. It doesn’t require an exact net worth.


Still, traditional financial planners tell you to save up 25 times your annual spending (not your annual income!). That’s because financial planners consider 4% a safe withdrawal rate: if you pull 4% out of your retirement portfolio in the year you retire, then adjust that upward each year for inflation, your net egg should last you at least 30 years. Financial advisors refer to this as the 4% Rule.


But if you retire at 40, you need your nest egg to last you 40-60 years, not 30. In that case, a 3.5% withdrawal rate should let your nest egg keep growing forever (see this explanation from CFP Michael Kitces for the math). Rather than multiplying your annual expenses by 25, multiply it by 28.6 to reach your target nest egg for early retirement.


Note that withdrawal rates only apply to your stocks and bonds, not your real estate investments. Your real estate generates ongoing income, with no need to sell off assets.




Most people who reach financial independence don’t actually stop working. Oh, they may quit their high-octane career job. But there are only so many days in a row you can sip margaritas on a beach before you get bored and fat.


Rather, most people simply switch to a new career that fulfills them. It may not pay well, but that doesn’t matter when you reach financial freedom. Some people start blogs or online businesses, such as travel blogs documenting their adventures. Others work for nonprofits, changing the world for the better. Some focus on writing novels, or painting, or other artistic endeavors.


But because you won’t actually stop working, you probably won’t stop earning money. You’ll just earn less than you do today — which means you don’t need to cover all of your living expenses with passive income. You just need enough to bridge the gap between what you spend and how much your dream job pays.


For example, imagine you spend $70,000 per year while working a soul-sucking job. You dream of becoming a travel writer, but that only pays $55,000. You don’t need $70,000 in passive income to quit your 9-5 job — you just need $15,000 per year, to supplement the income from your dream job.


You may not technically be financially independent, but who cares? You still get to live the same post-FIRE lifestyle without having to meet the full definition of financial freedom.




To reach financial independence and early retirement fast, cut your living expenses as low as you can. Not only does that boost your savings rate, allowing you to funnel more money into investments, it also lowers your target passive income and nest egg. Remember, for every dollar you spend in retirement, you need $25 invested (or $28.60 if you plan to retire young)!


For maximum savings in a single move, try house hacking to score free housing.

Automate your savings with a robo-advisor, or by setting up automatic recurring transfers.


When you’re ready to expand into rental properties, read up on down payment hacks to buy a rental property with no money down. But beware of using too much leverage in real estate investing, it can leave you with negative cash flow.


You’ll be surprised how quickly your investments take on a life of their own and start generating passive income. Avoid lifestyle creep as your income rises, and keep funneling your returns and passive income back into new investments.


Honestly that’s where the challenge of financial independence and early retirement lies: not in the math or investment strategies, but in the discipline of keeping your living expenses low and your savings rate high.


designer491/ iStock


The FIRE lifestyle of low living expenses and high savings comes with some surprising perks.


To begin with, recessions are less scary. As you earn more passive income, you rely less on your 9-5 job to cover your bills. If your job disappears to a recession, you can cover many of your bills with rental income, dividends, and other passive income sources.


That same lower dependence on your day job puts you in a better position to negotiate a higher salary or benefits. You can push hard because you’re less daunted by the idea of aggravating your boss. Your world wouldn’t end if you lost your job.


Those negotiated benefits could include working remotely, allowing you to move somewhere with lower cost of living. I live in Brazil for example, allowing me to live a luxurious lifestyle on relatively few US dollars each month.


You may not need life insurance or long-term disability insurance. Low living expenses and a high savings rate means your family could probably survive on one income, if one partner shuffled off this mortal coil.


While many young adults complain that student loans prevent them from investing, living a frugal lifestyle while paying them off makes it easy to keep that “extreme savings” going. You can just start funneling that money into passive income streams and retirement savings rather than student debt.


Read up on other hidden benefits of the FIRE lifestyle here.




Haters gonna hate — and the FIRE movement has plenty of haters.


Some say it involves too much sacrifice, that people pursuing FIRE save for the future at the expense of the present. As someone who saves 65% of his household income and spends months out of the year vacationing abroad, I can tell you firsthand that’s a bogus criticism.


The woke crowd might retort:


“Yeah but you’re a 40-year-old white male who owns an online business, you probably earn a boatload of money.”


I can assure you I do not. It took years for SparkRental to turn a profit, and even today we reinvest most of our profits back into the business. You know, doing evil things like hiring people and creating jobs.


To this day, my family lives almost entirely on my wife’s modest teacher salary.

Some whine that only married couples can achieve financial independence and early retirement. Others claim only single people can do it, citing marital disputes over money. They can’t both be right, but they can both be wrong.


Others worry about health insurance without employer coverage. Good thing you have so many health insurance options for early retirees.


Everyone has an excuse why they can’t build passive income and retire early. Most of them just don’t want to cut spending for a more frugal lifestyle — and there’s nothing wrong with that. By all means, live the normal suburban life keeping up with the Joneses. Just don’t tell me it’s impossible for middle-class people to retire at 40, because you’re wrong. Look no further than the Thompsons, who retired at 30.


Read the full list of FIRE movement criticisms, and the counterarguments from people actually living the FIRE lifestyle.





Love it or hate it, the FIRE movement proves that not everyone has to work the standard 40-year career. Some work for 10-20 years, invest a high percentage of their income, then reach financial independence and early retirement.


I plan to work forever — doing things I love. That includes writing, building lifestyle businesses, and perhaps working in the wine industry.


And the more passive income I earn, the less I worry about how much I earn from active income.


This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org







Featured Image Credit: Depositphotos.com.