Tax Advantages to Owning Real Estate

We've had a lot of bad news this past year and a half with financial markets crashing and foreclosures rising, but real estate continues to be a good investment.  Certainly you have to buy and sell at the right times to make money, but there are a variety of tax advantages to owning real estate that help make it a solid investment.  Remember, I'm not a CPA or an attorney, so you will always need to check with your advisors to make sure this information has not changed or applies to your situation. 

Tax Credits
I've mentioned the tax credits in earlier columns, so I won't discuss them in detail other than to say that most first time buyers and many repeat buyers are eligible for substantial tax credits through June 30, 2010 as long as the house they are purchasing is under contract by April 30, 2010.  There is some qualifying criteria that needs to be met, but these tax credits will go away next summer so eligible buyers need to act quickly to take advantage of them.

Sale of a Primary Residence
This has been around for several years, but I still have clients who are confused about this.  Right now, a homeowner can sell a primary residence every two years and not be subject to capital gains tax on the money made from the sale of the house.  A seller does NOT have to reinvest the proceeds in another home.  There are limits to the sales price.

1031 Exchange
This is a tax advantage for investors and a great way to increase your investment property holdings.  A 1031 Exchange is the exchange of one property you own, for another property (not your primary residence).  This is not a trade or exchange with another seller.  You have to take all the proceeds from the sale of your first property and place them on the purchase of one or more properties.  This allows you to defer any capital gains from the first sale.  You must hire a qualified exchange agent and follow some strict rules about timing and reinvestment of proceeds, but this is a great way to increase your real estate portfolio.

Mortgage Interest Deduction
We hear every year that this could go away, but the National Association of Realtors has fought hard to keep this tax deduction for homeowners.