Investing in real estate continues to be one of the best ways to build wealth and cut taxes. Benefits include the ability to recover the cost of income-producing property through depreciation, to use exchanges to defer profits from real estate investments, and borrow against real estate equity to make additional investments or for other purposes.

Additionally, homeowners can benefit from the personal-residence exemptionwhich shields profits on the sale of a personal residence from capital gains taxes, as well as the deduction for mortgage interest.

Read on to find out whether one or a combination of these strategies is right for you. For background information, read Investing In Real Estate. Exploring Real Estate Investments. Depreciation You can recover the cost of income-producing rental property through annual tax deductions called depreciation.

The Internal Revenue Code defines the depreciation deduction as a reasonable allowance for exhaustion or wear and tear, including a reasonable allowance for obsolescence. Real estate investors generally use a depreciation method called the Modified Accelerated Cost Recovery System MACRSin which residential rental property and structural improvements are depreciated over Depreciation expense often results in a net loss on investment property even if the property actually produces a positive cash flow.

This loss, as well as expenses, such as utilities and insurance, are reported on Schedule E, federal income tax formand deducted from ordinary income. This exchange must occur within a specified period of time. Although a exchange can broadly include various types of property, the vast majority of transactions relate to real estate.

To read more about this type of exchange, read Smart Real Estate Transactions. Property Regulations In order to successfully complete a exchange, the properties must meet the following criteria:. Any cash or property received through the transaction that is not considered like-kind property is considered boot and is subject to taxation.

Cash boot includes not only cash, but also physical property, such as fixtures.

Mortgage boot refers to any debt reduction that is achieved through the transaction. Thus, the amount of debt assumed with the replacement property must be equal to or greater than the value of the debt retired when the relinquished property is sold. For more on like-kind exchanges, read Trade Properties To Keep The Taxman At Bay.

Investor Regulations The investor must use a qualified intermediary. A qualified intermediary is an agent who facilitates the exchange process, largely by holding net proceeds from the relinquished property before they are re-invested in the replacement property. Only a qualified intermediary may hold those funds during the exchange.

The Federation of Exchange Accommodators details the role that the qualified intermediary plays in the exchange process. Borrowing Against Home Equity Investors who have built up sizable equity in either their personal home or investment property may simply choose to refinance their properties and pull out equity to make additional investments, improve the home, or for other purposes.

Regulations vary from state to state.

The ability to borrow will also depend on a borrower's credit scoretheir existing debt-to-equity ratioand their debt-to-income ratio. While this strategy is a bit riskier, for those able to handle the additional debt, it can help build wealth without having to enter into a exchange or sell a property. To learn more about home-equity loans, read The Home-Equity Loan: What It Is And How It Works. In addition, should the gains from the sale of a taxpayer's primary residence be greater than those exclusions, the taxpayer may forex pip and margin calculator invest that portion through a exchange.

Investors who live in areas where home values are appreciating can use a strategy of trading up to both build their personal wealth and minimize taxes at the same time. To learn more about the tax implications of selling your home, read Will Your Home Sale Leave You With Tax Shock? Mortgage Interest Deduction Homeowners can deduct the portion of their mortgages attributable to interest payments on their tax returns.

These payments are higher during the early years of the mortgage and gradually decrease as the mortgage is paid off. Read more in The Mortgage Interest Tax Deduction.

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The Bottom Line There are many options available to the real estate owner who is looking to sell while minimizing tax liability. Your personal situation will dictate which of these options is right for you, but any of them will help you get the most out of your real estate investment. For related reading, see A Tax Primer For Homeowners. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

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Use Real Estate To Put Off Tax Bills By William Artzberger Share. Exploring Real Estate Investments Depreciation You can recover the cost of income-producing rental property through annual tax deductions called depreciation. Property Regulations In order to successfully complete a exchange, the properties must meet the following criteria: The aggregate value of the replacement properties must be equal to or greater than that of the relinquished properties.

The properties included in the transaction must be like-kindmeaning real property cannot be exchanged for some other type of asset, such as a real estate investment trust REIT. For more information on REITs, read The Basics Of Rapid withdrawal binary options Taxation.

The exchanged properties must be held for "productive purposes put options tax treatment business or trade" an investment.

The investor is subject to two deadlines: Forty-five days after the sale of the relinquished property he must stock market secret1 a written list of qualified replacement property to a qualified party to the exchange, usually the intermediary. There are also several rules that limit the number of properties that can be identified.

Additionally, he must purchase the aggregate value of qualifying replacement assets within days of selling the relinquished asset or days after the due date of his tax return for that year, whichever occurs first.

To accomplish this in a tax-efficient way, the investor enters into a exchange agreement with a qualified intermediary and puts the original property up for sale. At the same time, the investor begins searching for replacement properties. On the day the investor sells the original property the relinquished propertythe net proceeds after paying all expenses are sent to a special account set up by the qualified intermediary.

The investor then enters into the identification period and has exactly 45 days to produce a list of qualified replacement properties and days to close on the replacement property during the exchange period. Using the entire proceeds from the sale of the relinquished property, the investor closes on the new investment property or properties. The qualified intermediary wires those funds to the title company, the special account is closed and the transaction is completed.

A exchange allows the returns from a sale to be reinvested into like-kind property. A home-equity loan taps directly into the value of the property and can be used for a variety of purposes. The sale of a principal residence is eligible for special tax treatment.

Mortgage interest can be deducted at tax time.

Like-kind exchanges can mean a much lower tax bill on real estate for savvy investors. In regards to the sale of property, particularly in real estate, a exchange is increasingly being recognized for its tax benefits to investors of all levels. Real estate swaps grow popular, but traps are many. Beware new rules on vacation homes.

If you have property to sell and want to avoid capital gains tax, a Section exchange may be the answer. If your home or second home is not in the United States, you can still get U. How many and what kind depends on whether you also rent it. Rental property ownership has its benefits but when selling you can face a big tax hit.

Thankfully there are ways to reduce your capital gains exposure. Anyone involved in a real transaction can benefit from gaining a basic understanding of the different methods of real estate valuation. It's a bit tricky, but a valuable tool to make your investment pay off.

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If you can't afford property close to home, consider taking the real estate plunge elsewhere in the country. Learn what it takes for institutional investors to consider a property "investment grade," such as real estate investment An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

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