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Have you been searching for new and effective ways to create a passive income? While you may already know that real estate investing offers an array of benefits, did you know it’s an extremely popular side hustle for people from all walks of life?
The ability you have to create generational wealth and cash flow that can replace any need for a traditional “day job” is a real possibility when you choose this investment path.
The Top Ways to Make Money By Investing in Real Estate
There are four main ways you can begin making money by investing in real estate. These include:
- Appreciation: The value of the property goes up as time passes
- Cash Flow: You have a recurring source of cash flow
- Mortgage Paydown: Your mortgage is paid down by the tenant, which increases total equity in your property
- Taxes: (discussed more in depth below)
Did you know there are countless tax benefits offered when you invest in real estate? There are – and you can learn about the most appealing of these here.
Depreciation Shelters Income from Taxes
Depreciation is used by the IRS to acknowledge that the asset is going to wear down as time passes. According to the IRS, residential real estate will wear down in 27.5 years. Other assets have unique timelines.
Unlike your other business expenses, depreciation is considered a paper loss. What this means is that you don’t spend any money, but you still get the same expense. It’s this expense that can help to offset the taxable income and help you save money on your tax costs.
Short- and Long-Term Capital Gains
Based on the length of time you have an investment before you sell it, the capital gains can be considered either short-term, which is anything under one year, or long-term, anything over a year.
A short-term capital gain is taxed as ordinary income, which means it is dependent on your tax bracket. However, with long-term capital gains, they will fall into one of three categories that your accountant can help you better understand.
Avoid Paying FICA Tax on Your Rental Income
Just like the interest income and dividends, rental income isn’t subject to Medicare taxes or social security taxes – also known as FICA. While this isn’t a huge benefit compared to some of the other investments, it is significant enough to matter.
Refinancing a.k.a. Tax-Free Borrowing
If you choose to refinance, you can borrow against the appreciation in the real estate and the increased equity in the property completely tax-free. You will then be able to use those funds for additional investments and purchase more real estate (if desired).
As you can see, there are several tax benefits offered when you invest in real estate. Be sure to keep this in mind to see why this may be a smart investment for you now or later in life. Also, be sure to find a tax professional that specializes in real estate investments to ensure you reap all the benefits available.