In many situations it’s more tax effective to hold rental real estate versus selling. The buy-and-hold real estate strategy involves buying property and renting it out for an extended period of time. Instead of buying a rental property with the intention to flip it and sell it, the goal of buy-and-hold real estate is long-term profitability. Along with long-term rental income, holding rental real estate comes with other benefits. Including long-term property appreciation, tax benefits, and hedges against inflation. * This is not meant to be construed as tax advice. Please consult your CPA or qualified tax individual for more information.
When it comes to tax benefits, buy-and-hold real estate offers many unique advantages for investors who do it right.
Deductible Operating Expenses
Thinking about buying and holding rental real estate in Temecula, Murrieta, or the surrounding areas? You’ll quickly realize that there are countless deductible operating expenses that you can write off. This will help reduce how much you owe the IRS at the end of the year. Some of the most common landlord tax deductions include:
- Depreciation– one of the most significant deductions a landlord can write off when holding rental real estate. This doesn’t impact your cash flow.
- Transportation– Gas, tolls, and other costs related to getting to and from your rental property are tax-deductible
- Interest– Mortgage interest, interest on your HELOC for purchases used for your rental. The interest added onto any other loans associated with your rental property are fully deductible on Schedule E of your tax return.
- Paying employees and contractors– If you pay employees or contractors to help you run or maintain your rental property, their wages are tax-deductible.
- Regular maintenance– You can write off most of the products and services you buy to provide regular and emergency maintenance on your property
- Property management fees– If you hire a property management company to help you run your rental properties, their fees are tax-deductible
- Real estate education– any courses you invest in to help you learn more about property investing can be written off.
Tax Benefits For The Self-Employed
Buy-and-hold investors are not required to pay self-employment taxes. They can still take advantage of the tax benefits that come with being self-employed. Self-employed investors can take home office deductions, travel deductions, and meal deductions. Not to mention any costs associated with legal or accounting fees. Investors who fix and flip properties don’t always get the same tax benefits.
20% Pass-Through Deduction
Another reason that it makes sense to hold rental real estate is that you have the opportunity to qualify for the 20% pass-through deduction as a real estate investor. This allows you to deduct up to 20% of qualified business income from your taxable business revenue. There are quite a few rules and regulations associated with this specific tax benefit. It’s recommended that you talk to a tax professional before claiming it.
Defer Capital Gains
The buy and hold strategy in real estate gives investors the option to defer their capital gains taxes. In some circumstances you can put off paying them altogether. According to Bankrate.com, “Capital gains are profits made from the sale of real estate, investments and personal property. The Internal Revenue Service (IRS) classifies capital gains according to the length of time the taxpayer owned the property. Ask your tax professional about installment sales and opportunity zones to see if either strategy would work in your favor.
Understanding (and taking advantage of) the many tax benefits that come with holding rental real estate can be a challenge. This is why many California investors hire top-level property management companies to assist in their long term goal of holding their rental real estate versus selling.
Schedule a chat with our team to ensure you’re making the most of the tax benefits offered to long-term investors, or check out our list of owner services that will make owning rental property in Temecula or the surrounding areas more profitable.