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Tax Guidelines for Real Estate Investments

A real estate investment should provide a current income return and an appreciation in the value of the original investment. An additional inventive, a real estate investment may in the early years of the investment return income subject to little or no tax.

Real estate investors may take advantage of these tax benefits:

  • Sale of investment property may be taxed at capital gain rates.
  • Depreciation can provide a source of temporary tax-free income.
  • Rental income can be used to offset passive losses.
  • Tax-free exchanges make it possible to defer tax on exchanges of real estate held for investment.

Losses on real estate transactions may be subject to the following disadvantages:

  • Rental losses may not be deductible from other income such as salary, interest, and dividends unless you qualify as a real estate professional or for the special $25,000 rental loss allowance.
  • Restructuring of mortgage liability may subject you to tax.