5 Real Estate Tax Secrets for Investment Properties

Most people have never heard of these tax strategies that involve an investment home. These tips will help you maximize your tax savings, and will give insight as to how to manage having a second home.

Tip #1: Take advantage of ‘safe harbors’

Don’t let your second home sit vacantly while you’re not there, rent it out! This will provide an extra income, and you can deduct related expenses such as repairs, insurance, real estate taxes, and a mortgage interest. The IRS also has a “safe harbor” policy for rental property expenses for $2,500.

However, if you are personally using the property for more than 14 days per year, there will be different tax implications, so consult with an accountant to determine what the specifics would be.

Tip #2: Depreciate your rental property

The IRS views a rental property as a business expense, which means they expect it to depreciate over time. The benefit of this is that you can deduct some of the cost of the home for upward of 27.5 years.

Tip #3: Depreciate is actually a ‘phantom deduction’

The IRS defines depreciation losses for rental properties as an allowance given to owners for the wear and tear and normal use of the property. While the IRS compensates landlords and owners for the depreciation of their assets, homes actually appreciate in value, so the loss the IRS allows doesn’t happen. This saves money on taxes, while still making a profit.

Tip #4: The 1031 exchange

This tax rule lets people sell an investment property for a profit, while moving the proceeds directly to another investment property, while deferring the tax liability. By paying capital gains tax, this can increase the value of your holdings without affecting your capital. Also, if the money in holding remains untouched before closing, the original sale will have no tax due.

Tip #5: Leave more money to your heirs

If using the 1031, heirs are left with real estate that has a lower tax basis than its actual value, because the tax law states that when someone passes away, the gain inherent in their investment is gone. If you’re looking to get cash out of the property, just refinance it and take out a home equity line of credit. Also, there is no tax on debt so having a home equity line of credit is simple for getting cash flowing without having an extra tax expense.





Heidenry, Margaret. “Shh! 5 Real Estate Tax Secrets the Rich Don’t Want You to Know.” Realtor.com, 14 Mar. 2017. Web. 30 Mar. 2017.

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