These Real Estate Investments Can Be Tax-Advantaged Too!

Capstone’s investment opportunities are not the only ones to offer tax advantages. These 8 real estate investments offer tax benefits as well.

Capstone Capital Partners offers investment opportunities for accredited investors interested in private real estate financing. The Capstone Growth Fund allows us to make hard money loans for a wide range of real estate projects. We target 10% returns for our investors. The fractional loan program allows you to become a lender by researching vetted and approved borrowers and deciding where to place your money. These programs offer excellent returns and certain tax advantages. This means that our investors can earn returns while also saving on their tax bills. Capstone’s programs are not the only types of real estate investments that offer tax benefits. This article describes other investments that may have tax advantages. By understanding the potential tax benefits of these other investments, you can better assess whether Capstone’s programs are right for you.

Photo by Samuel Cruz on Unsplash

Fix-and-flip properties

Fix-and-flip projects, also known as “house flipping,” involves purchasing a distressed property, repairing or rehabilitating it, and selling it for a profit. One major tax benefit of many types of real estate investment involves the deductibility of expenses. House flipping may be considered a business activity, so expenses directly associated with a fix-and-flip investment may be tax deductible. The best way to ensure you can deduct business expenses is by forming a business entity like a limited liability company (LLC).

Examples of deductible expenses for fix-and-flip investments include:

  • Home repair or improvement costs, including labor and materials

  • Property taxes for investment properties

  • Interest on real estate loans

  • Permits and licenses

  • Commissions paid to real estate agents

  • Office supplies

  • Overhead for an off-site office, including utilities, internet, and rent

Fix-and-flip investors may also deduct capital losses and carry them forward to future tax years. Not every project will be profitable. Investors may use their losses to offset their capital gains tax.

Note that fix-and-flip properties are not eligible for 1031 exchanges, discussed further below. The statute specifically excludes property where the investor’s intention is to sell.

Rental properties

Owning a rental property can produce a steady revenue stream. It also means being responsible for property maintenance. The expenses associated with owning a rental property are likely to be tax deductible. This includes the types of expenses involved in fix-and-flip properties. It may also include property management fees and depreciation.

Rental property owners who sell a property may also be able to defer tax on the gain from that sale. Profit on the sale of an investment property is typically subject to the capital gains tax. A 1031 exchange, named for that section of the Internal Revenue Code (IRC), allows investors to defer capital gains tax if they use the proceeds from the sale of one investment property to purchase another investment property. This is subject to two deadlines:

  • The investor must designate the replacement property they intend to purchase within 45 days of the sale of the original investment property.

  • They must close of the replacement property within 180 days of the sale.

House hacking

“House hacking” refers to renting part of one’s residence to others. This can range from making part of a single-family home available for rent to living in one unit of a multifamily property and renting out the rest. It can be a way to save on living expenses, or it can be a real estate investment strategy.

Investors involved in house hacking may be able to deduct business expenses related to their rental activities. This may be easier in multifamily properties than in single-family homes, but it is possible in either case.

A 1031 exchange may be possible when selling a property used for house hacking. Another option may be a 121 exclusion. Section 121 of the IRC excludes up to $250,000 from the sale of one’s primary residence from their taxable income, provided that they lived their for at least two of the past five years. For a married couple where both spouses meet the 2-out-of-5-years requirement, the exclusion amount is $500,000.

Farm animals or crops

Real estate investors may be able to take advantage of significant tax credits and tax deductions by placing farm animals on their investment property. This may include federal income tax and state property tax benefits.

Simply placing a few horses or other animals on land does not turn it into a farm. The IRS defines a “small farm,” for tax purposes, as an active operation that cultivates land or manages livestock for profit. If the main purpose is recreation, such as if someone has horses or grows crops for their own enjoyment, they may not claim any tax benefit for farms.

Expenses related to operating a small farm may be tax deductible. Farm owners can use Schedule F to report income and expenses on their federal income tax returns.

At the county level in Texas, placing livestock on property could help owners save on their property taxes. Agricultural land is subject to a different valuation system than other types of property. The specific criteria and requirements may vary from one county to another, so the local tax appraiser’s office is probably the best resource.

Real estate investment trusts

A real estate investment trust (REIT) is a business that purchases, owns, and sells real estate to generate revenue and profit. Investors buy shares in the business, but generally do not participate directly in real estate-related activities. Their position is similar to that of shareholders in corporations.

REITs offer several tax advantages over other types of investments. Investors may reduce their tax rate by 20% for certain REIT dividends through the qualified business income deduction. For example, a REIT investor in the highest tax bracket could lower their tax rate from 37% to 29.6%

Real estate syndications

Real estate syndication has superficial similarities to REITs. Both involve businesses that invest in real estate on behalf of investors. REITs are ongoing businesses that engage in a variety of investment activities, while syndication pools money from investors for specific projects.

Because real estate syndications may be involved in such a wide range of projects, the tax advantages may vary greatly from one to another. Generally speaking, tax strategies that may benefit investors may include the following:

  • Depreciation deductions

  • Loss carry-forwards

  • 1031 exchanges

Opportunity zones

The Tax Cuts and Jobs Act of 2017 created a new way for real estate investors to defer capital gains taxes on the sale of real estate. They may defer taxes by investing the sales proceeds into a “qualified opportunity fund.” The fund invests in properties located in low-income areas designated as “qualified opportunity zones.” Currently, this provision of the IRC ends on December 31, 2026.

Real estate investments through retirement accounts

Retirement accounts like 401(k) plans and IRAs offer various tax advantages. Some types of retirement accounts allow investors to use account funds for real estate investments. This is not possible with a standard IRA. An investor would need a self-directed IRA (SDIRA) to include real estate in their retirement portfolio.

This type of investment is risky and subject to numerous restrictions. Any property purchased must be solely for investment purposes, meaning the investor cannot use it themselves. Financing a purchase through an SDIRA is almost impossible, which limits many people’s options.


Learn more about Casptone’s investment opportunities

Real estate debt investments offer good returns with minimal risk. Capstone Capital Partners offers hyperlocal trust-deed and first-lien investments for Texas investors. Please contact the Capstone team today through our online contact form to learn more about our investment opportunities.

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