How to Use Your Real Estate Investments to Defer Taxes

Couple looking at a list of propertyReal estate investments remain to be one of the most advantageous ways to increase wealth and reduce taxes. Benefits include implementing 1031 exchanges for deferring taxes on like-kind properties and borrowing against property equity for other investments. Also, homeowners could leverage mortgage interest deduction and the personal residence federal exemption to do away with capital gains taxes.

The 1031 Exchange

Also called the like-kind exchange, this enables individuals to defer taxes through selling a qualified investment property and utilizing its equity for buying another property that has equal or greater worth, explain experts from 1031 Exchange Place. While the 1031 exchange covers a wide range of properties, most qualified transactions involve real estate investments.

The Personal Residence Exemption

Gains from selling a homeowner’s primary personal residence won’t incur capital gains taxes up to $250,000 for unmarried individuals and $500,000 for married individuals, provided that the individual has resided in the house for at least two of the past five years. Additionally, if the gains are higher than the exemption, the homeowner could invest the remainder of the gains in a 1031 exchange.

Using Home Equity

If you’ve managed to build up substantial equity in your house or an investment property, you could consider refinancing that property and use the equity for making repairs on your home, investing in another property, or for something else. Rules differ from one state to another, but generally speaking, you could borrow up to 80% of the combined LTV or at least 50% of your property’s fair market value, whichever’s less.

Deduction on Mortgage Interest

You could choose to deduct your mortgage interest payments on your tax return. Do note though that your payments would be higher in the initial years of your loan but would gradually lower as you pay off your mortgage.

Anyone with real estate investments should count themselves lucky because of the options available to them regarding increasing their wealth while reducing their tax liabilities. They could choose a 1031 exchange, personal residence exemption, home equity loan, and mortgage interest deduction. Of course, your financial circumstances should dictate the best option for you, but any of these would help you make the most of your property investments.