Real Estate Tax Benefits for a Physician Entrepreneur
“The major fortunes in America have been made in land.” – John D. Rockefeller
You might have already heard or read about this famous saying more than a few times–’real estate investments have a lot of tax benefits.’ In my personal experience, this phrase is always mentioned with a non-specific follow up that does not give much information on how, what, why, and etc. In this chapter you will learn the different real estate tax benefits for a physician entrepreneur.
Why invest in real estate? What are the benefits of investing in real estate? Real estate investments are one of the safest and most reliable sources of wealth generation. When you make profits from any business related investments, it is obviously subject to taxes. Real estate investment related expenses however qualify for a lot more real estate tax deduction compared to other businesses. The end result being more money in your pocket.
As an example, if you invest $100 USD in to stock market, vs. $100 USD into rental real estate property, although you may make $12 per year gross income on both investments; after taxes you probably end up taking home $8 from the stock market, and $11 from the real estate investment. This is due to the real estate related deductions leading to much reduced taxable income. Let’s find out why.
Real Estate Tax Benefits for a Physician Entrepreneur
Let’s assume you own a bunch of rental properties that makes $100,000 USD per year in rental income. Mentioned below is a sample of the tax deductions that can apply to the rental income.
|Total Rental Income Per Year ||$100,000 |
|Property Taxes ||($8,250) |
|Depreciation ||($13,500) |
|Property Insurance ||($4,500) |
|Interest on Mortgage ||($27,000) |
|Maintenance and Repair Expenses ||($11,750) |
|Travel Related and Car Expenses ||($5,000) |
|Utilities (i.e. Telephone Bills) ||($2,000) |
|Real Estate Related Conferences and Education ||($3,500) |
|Business Food Expenses and Entertainment ||($4,500) |
|Home Office Expenses ||($6,000) |
|Net Taxable Income ||$14,000 |
In the above example, you can see how the $100,000 USD rental income was eligible for multiple tax deductions, and the final net taxable was only $14,000 USD. Instead of paying taxes on $100,000 USD, you pay taxes only on $14,000 USD.
- Deductions: One of the primary real estate tax benefits you get in an investment comes in the form of real estate tax deductions. Based on the nature of property you own, real estate tax deductions can come in several forms. This can in the form of mortgage interest, operating expenses, maintenance, property tax, property depreciation, business-related food expenses, business-related travel and car expenses, business conferences, and etc.
- Long-Term Capital Gains: Generally, if you’re holding on to a property for over a year, you qualify for long-term capital gains. When you sell the property after holding it for at least a year, the real estate returns you make on the sale of this property will be taxed at long-term capital gains rate as opposed to short-term capital gains rate. Long-term capital gains are taxed at a lower rate compared to short-term capital gains. Short-term capital gains are taxed at normal income tax rates. For the year 2019, long-term capital gains are taxed at a 0% rate if they fall below $39,375 USD of taxable income ($78,750 USD if you are married and filing jointly). They are taxed at a 15% rate if they fall above the $39,375 USD but below $434,550 USD ($488,850 USD if married filing jointly). They are taxed at a 20% rate if they fall above $434,550 USD.
- Depreciation Real Estate Tax Breaks: Even though the value of your real estate property increases over time, IRS allows you to take depreciation real estate tax deductions. Depreciation is taken on a yearly basis. It is a powerful tax write off strategy. You qualify for depreciation only if: (1) you own the property, and (2) if your property generates income. There is a lot more to know about depreciation, however, it is beyond the scope of this article. All you need to understand is to find out if you qualify for it, and if you do, make sure to sit down with your CPA and have them hash it out for you.
- 1031 Real Estate Exchange: A major real estate tax break that you can gain on your investment comes in the form of the 1031 real estate exchange. This tax code helps you to defer taxes or pay zero taxes for now, on your capital gains. This is done by providing evidence to the IRS that the money (or parts of it) for the property you’re about to buy came from selling another property. If you can prove this, the IRS will not charge anything on your capital gains. You are not eliminating the tax here, but instead you are deferring it to a later date. Please refer to this article to learn about how the 1031 real estate exchange can help physician entrepreneurs grow their wealth.
- Real Estate Professional Status (REPS): There is a way to shelter your W-2 income with Real Estate Professional Status (REPS). Read this blog post to understand the details of REP status, to check if you qualify for it in order to shelter your W-2 income from being taxed.
Benefits of Investing in Real Estate – Why Invest in Real Estate?
- Stable Source of Income: The primary advantage of investing in real estate (buying a real estate rental property home vs. investing in syndication investments or REITs) is that it provides stable cash flow. If smart choices are made during investing, the value of a real asset almost never depreciates, and so you may rely on it to provide a stable cash flow.
- Long-Term Security: As a real estate asset provides a stable source of cash flow, it can be a major benefit in the long run. Say you are thinking ahead and investing in several real estate assets so that after a certain period of time, you can rely on your properties to get you a certain fixed amount of annual return. In essence, a real estate asset can be a source of long term financial security.
- Real Estate Tax Benefits for a Physician Entrepreneur: Massive tax benefits come attached with investing in real estate. These real estate tax benefits have been created to encourage investors to invest in the real estate market, as it has proven to be good for the economy.
- Appreciation of Value: A real estate asset is generally used as a long-term investment, as the value that appreciates over a long period of time provides a higher return.
- Immune to Inflation: A real estate asset does not depreciate in value with inflation. Rather, the value increases as inflation increases. This provides an exciting opportunity for people looking to invest in real estate such as investors to not worry about economic fallout.
Do you have real estate in your portfolio? Do you know of any other creative tax saving strategies or real estate tax benefits? Tell us in the comments section below.
Majority of the tax benefits apply only to the gains you make on the real estate investments. Passive losses cannot usually be carried on to your W-2 income to shelter the W-2 income from being taxed – EXCEPT in one situation. This is called Real Estate Professional status. Read this blog post to understand the details of REP status, to check if you qualify for it in order to shelter your W-2 income from being taxed.
Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How.
Stay in touch with us by signing up for our newsletter. The newsletter will keep you up to speed on the current real estate investments we are looking at, provide physicians with investment opportunities, and much more.
Legal Disclaimer: This is not investment advice. I am not a legal and/or investment advisor. This is my personal blog, and all information found here, including any ideas, opinions, views, predictions, forecasts, commentaries, suggestions, or stock picks, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. These are my views, it is not a production of my employer, nor is it affiliated with any broker/dealer or registered investment advisor. While the information provided is believed to be accurate, it may include errors or inaccuracies. To the maximum extent permitted by law, PhysicianEstate disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. You should consult with an attorney or other professional to determine what may be best for your individual needs. Your use of the information on the website or materials linked from the Web is at your own risk.