Real estate offers some of the most lucrative tax benefits for high-income earners. From depreciation to 1031 exchanges, these strategies can help you reduce your tax liability while building a robust portfolio.
Key Strategies:
- Depreciation: This non-cash expense allows you to deduct a portion of your property’s value annually, reducing your taxable income.
- 1031 Exchanges: A 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds from a property sale into a similar property within 180 days. This strategy promotes portfolio growth without immediate tax consequences.
- Cost Segregation: By accelerating depreciation on specific components of a property (e.g., HVAC systems, flooring), you can front-load tax savings.
- Passive Loss Deductions: For those qualifying as real estate professionals, passive losses can offset active income, significantly lowering overall tax liability.
Example
Jane, a real estate investor, sold a rental property with a $200,000 capital gain. By executing a 1031 exchange, she deferred the entire tax liability, allowing her to reinvest in a larger property without losing capital to taxes.
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