Massive Tax Deductions in Real Estate

Did you know that real estate investments can actually help to reduce the amount you owe in federal income tax? Both mortgage interest and property depreciation may qualify as tax deductions. Let me show you a real-life example of how you can get a rather large tax deduction by investing in real estate.

Before getting into the details of how real estate investments can provide tax deductions, let’s back up and talk about your adjusted gross income (AGI). Lately, people have been hearing a lot about AGI as it relates to receiving a government stimulus check. In general, AGI is defined as total income minus all tax deductions and write-offs. Most people use what is known as the standard deduction.  If you file your taxes as a single person or married filing separately, the standard deduction is $12,400. The standard deduction for married couples filing jointly is $24,800. The standard tax deduction, however, does not let you capture all of the tax benefits of real estate investment. You’ll need to use itemized deductions to capture these potentially massive benefits.

Here, is the scenario:

A group of real estate investors each place money (in my case $50,000) into a pool used to purchase two large apartment buildings outside of Atlanta. Each of the investors in the company receives a portion of the building’s total depreciation, (which equaled $39,919 for me in this year). The depreciation acts like an expense that can offset other income and reduce the taxes due at the end of the year (or even increase the tax refund). This is one of the many ways wealthy people like Warren Buffet can use the United States tax laws in their favor and pay a lower effective tax rate than their secretaries.

The picture below shows the K-1 tax document for the property in 2019. The company purchased the property on October 8, 2019. From that date until the end of the year, each investor received a total of $643 in payouts and a loss of $39,319 that resulted from the depreciation of the property.

Disclaimer

I am not a CPA or a tax advisor. Always consult a tax professional before taking any kind of investment action.