One thing that helps the wealthy maintain their wealth is taking advantage of all the tax breaks available to them. This tactic applies not only to income taxes but to real estate taxes as well.
Margaret Heidenry at Realtor.com offers five tips that can help you save money on real estate taxes this year. That’s the good news.
Note, however, that the tips apply to second homes and investment properties, not your primary residence. But investing in real estate is a time-tested method for building wealth and even if you don’t have a second home or a rental property, looking over these tips might give you some ideas of why you might think about investing in real estate.
Take advantage of safe-harbor rules. If you own a second home, consider renting it out when you’re not using it. The tax rules are different if you personally use the home for more than 14 days a year, so make sure you are aware of the rules that apply in your case. Renting out the second home provides additional income, but it also allows you to deduct expenses like maintenance, real estate taxes and mortgage interest.
Depreciate rental property. Because the U.S. Internal Revenue Service (IRS) treats rental property as a business expense, the tax rules allow you to deduct depreciation losses for more than the 27.5-year time span the IRS views as the deductible life of a single-family home.
Depreciation is a “phantom deduction.” If you’re thinking that houses more often appreciate in value rather than depreciate, then you’ve hit on the true importance of depreciation losses: as the market value of your property rises, the depreciation never actually happens. You save on taxes and you profit as the value of the home rises.
Take advantage of the 1031 exchange. When you sell a rental property you can avoid paying capital gains taxes by reinvesting the proceeds from the sale in the purchase of another, more expensive property. That’s the 1031 exchange rule. It’s a little more complex than that, but essentially you can maximize the value of your real estate investments without eroding your capital by having to pay capital gains taxes.
Leave more money for your heirs. Using the 1031 exchange allows your heirs to sell the properties based on the price (basis) you paid for the property, not on its sale price. This can amount to a massive amount. If you want the cash yourself, take out a home equity line of credit (HELOC).
More details and caveats are available at Realtor.com.