Owning property can offer a plethora of benefits. Many properties provide a balance of equity growth and cash flow, but the tax benefits are probably the greatest perk.
At Santa Cruz Properties, we are very familiar with the tax benefits of owning land, and we will share some of them today with you. Take the following information into account the next time you consider investing in property.
Growth From Tax Protection
Most people trying to invest in property hope their properties become more valuable each year. Some of the growth can arise from monthly mortgage payments, which raises your equity ownership of the land.
Other examples of growth come out of your property doubling in cost because of a healthy market or, in the case of properties, a result of growing net operating income. Since the Internal Revenue Service (IRS) does not acknowledge capital gain until you decide to sell the property, your revenue keeps growing so long as it remains in the property.
Cash Flow from Less Taxes
The only requirement you have from the IRS is to pay tax on the profit you make from your land. To get an estimate of your profit, add up all your rental and other sources of income and take it away from all your expenses. Your property costs include mortgage interest, repairs, property taxes, and management fees. It can also include bills associated with travel. Depreciation of your property gives you the option to write off some of the property’s purchase price each year to acknowledge that it gradually wears out.
You don’t spend any money to acquire the depreciation deduction, but doing so can help offset other income, dropping your tax liability.
Passive Activity Loss Deductions
With every expense you make on your investment property, it’s practically inevitable to have a taxable loss. In the vast majority of cases, you cannot take advantage of losses from passive activities, such as investing, to compensate for the active income that you receive from your job.
Despite this, the IRS will let you claim at least $25,000 in passive activity losses from rental real estate versus your average income. To be eligible for this tax benefit, your modified adjusted gross income needs to fall under $100,000 — or less than $50,000 if you’re married and file separately. For income above the modified adjusted gross income threshold, you are able to claim a passive activity loss of $1 for each $2 of income.
Exchanges Excluding Taxes
If you were to sell your property and use the funds to invest in more land, even if it is of a different kind or different location, you can set up the sale as a tax-deferred exchange.
In accordance with the IRS’ rules, you can take your cost basis from your old property to transfer into your new property. Since the IRS doesn’t view this sort of transaction as a sale, you won’t owe any capital gains taxes nor depreciation taxes on the exchange.
Long-Term Capital Gains
In regards to selling and paying capital gains, it is highly recommended to stick with long-term capital gains to be taxed less. Following this approach will give you the chance to deposit on your deductions to reduce your taxable summary.
If you were to rent out a property, it would go through expected wear and tear. That would be considered depreciation of the property, which you can remove. While your property may be bringing in a favorable amount of cash flow from rental income, you can still cancel out depreciation costs from wear and tear.
Live the Dream of becoming a first-time property owner with the help of the realty specialists at Santa Cruz Properties
Thanks to tax deductions, owning land might be one of the wisest investments you can make.
Santa Cruz Properties wants to give any family the opportunity to own land at a fair rate. If you are seeking owner-financed land for sale in Hidalgo County and Starr County, give us a call today!!