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My grandma (hi GG), always says there are two things you have to do. 1. die and 2. pay taxes. Although, morbid and both are not ideal it is true. Physicians are often high-income professionals or self-employed so you will get crushed with taxes. One way physicians can decrease their tax burden is by investing in real estate. In fact, it is one of the numerous benefits of real estate investing. I am absolutely not a tax expert so please consult one if you want to know further. In this blog post, we’ll explore the key tax advantages available to physician real estate investors, empowering you to make informed decisions and maximize your returns.
4 Key Tax Advantages For Physician Real Estate Investors
Depreciation
One of the most significant tax advantages in real estate investing is depreciation. Depreciation is a tax advantage that allows physician real estate investors to deduct a portion of the cost of their investment property over its useful life. The IRS actually encourages this. Since investment properties have a limited lifespan, they allow investors to spread the deduction of these costs over several years. The IRS allows investors to deduct a portion of the property’s value as depreciation over its useful life. Typically 27.5 years depending on the property and scenario. So, this allows you to reduce the property’s taxable income each year. This limits your tax burden and leads to significant tax savings, as it lowers the investor’s overall tax liability while allowing them to maintain a steady cash flow.
By leveraging depreciation, real estate investors can maximize their returns by minimizing their tax burden and, in turn, reinvesting those savings into additional properties or other investment opportunities. Also, there are really cool tax strategies like cost segregation studies that can allow you to take that depreciation in an accelerated fashion. So, you do not have to wait the full 27.5 years. Stay tuned for another post on that or read more here!
Mortgage Interest Deduction
Physician real estate investors who finance their properties through mortgages can benefit from the mortgage interest deduction. This is pretty simple, essentially you deduct the interest paid on your mortgage loan.
Property Tax Deduction
Owning real estate also gives you the opportunity to deduct property taxes paid on your investment properties. Property tax deductions can provide significant savings, especially if you own multiple properties. Be sure to keep track of your property tax payments and consult with a tax professional to ensure you’re maximizing this deduction within the confines of the tax code. This is another one of those weird tax things that varies by location.
1031 Exchange
Physician investors looking to sell their real estate investments and reinvest the proceeds can take advantage of a tax provision called a 1031 exchange. This provision allows you to defer capital gains taxes by reinvesting the proceeds from the sale into a similar “like-kind” property. By deferring taxes, you can continue to grow your real estate portfolio without incurring an immediate tax liability, effectively leveraging your investment capital.
This tax strategy is awesome and allows you to accumulate wealth by trading up to higher/larger properties over time. However, make sure this makes sense for you. For example, if the home is your personal residence and you live in it for greater than 2 out of the last 5 years then you can be exempt from capital gains taxes. In this scenario, it does not make sense to do a 1031 exchange. Honestly, 1031 exchanges are complicated and it is crucial for investors to work with qualified intermediaries and tax advisors to ensure compliance with the 1031 exchange rules and maximize the benefits of this powerful tax-saving tool.
Real estate offers numerous benefits and tax advantages for physician real estate investors and we only have begun to scratch the surface of the tax advantages in this post. Which is your favorite? What are some of your favorite tax tips? If you want to read more about real estate investing and assisted living home investing then you are in the right spot. Read more blog posts here!
Again, this is not investment or tax advice. It’s always a good idea to consult with a tax professional for personalized advice based on your individual circumstances.