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MESSAGE FROM BROKER/TOC
A. MEASURING AND COMPARING
INVESTMENTS
B. REAL ESTATE FINANCE
C. PURCHASE AND SALE ISSUES
D. LEASE LINGO AND LEASE NEGOTIATION
ISSUES
E. TAX ISSUES
E. TAX ISSUES
1.
Why Are Some Real Estate Investments Referred to as “Tax Shelters”?
Many real estate investors prefer real estate investments
over other investment vehicles due to the ability to claim depreciation
deductions, also known as “cost recovery” deductions.
These are tax deductions related to the annual depreciation in value
associated with the aging of real estate improvements. Generally
speaking, the IRS currently permits: (a) the value of residential
improvements (e.g. apartments) to be depreciated over a useful life
of 27.5 years, and (b) the value of commercial improvements (e.g.
office buildings and retail centers) to be depreciated over a useful
life of 39 years. Under the pre-1986 tax code, there were many perceived
abuses with depreciation deductions and now these deductions are
governed by complex rules that are beyond the scope of this Learning
Center. Among these are rules that limit “passive loss”
deductions in many circumstances. For some investors, however, the
opportunity to benefit from depreciation deductions continues to
be an important advantage of investing in real estate.
2. Are There Other Tax Advantages to Real
Estate Investments Besides Depreciation Deductions?
You should consult a tax professional as to how a real
estate investment will impact your personal tax situation. Our purpose
here will be to just briefly describe some additional tax benefits
that may be applicable to you.
- Interest Deductions.
Where borrowed funds are used to leverage an investment, interest
payments are generally deductible.
- Capital Gain Treatment.
Where real estate is held for an investment intent
and held for a sufficient holding period (typically one (1) year),
gain upon sale is typically categorized as long term capital gain
with a current tax rate of 15% (instead of much higher tax rates,
as high as 39.6%, applicable to “ordinary income”).
It should be noted that capital gain treatment does not apply
in many circumstances, such as lots held as “inventory”
by a residential real estate developer.
- Availability of Section 1031.
Unlike investments in stocks and bonds, real estate
investments may benefit from the ability to structure a sale and
purchase of replacement property as a tax-free exchange under
Section 1031 of the Internal Revenue Code. At Harbor City, our
commercial specialty is assisting investors with 1031 exchange
transactions. To learn more about 1031 exchanges, please click
here to jump to the 1031 Exchange section of this website.
We hope you have found this Learning Center
to be helpful. Should you have further questions, don’t hesitate
to call Harbor City for help. Also, be sure to explore some of the
other features that the Harbor City website has to offer, such as:
Harbor
City Commercial Corridor Review
Harbor
City Commercial MLS Search Engine
Harbor
City Investor Assistance Questionnaire
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