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Lowering Your Adjusted Gross Income (AGI) with Income Properties

Real estate has long been lauded not only as an avenue for wealth creation but also as a tool for savvy tax planning. Investing in income properties can provide opportunities to decrease your Adjusted Gross Income (AGI) while building equity and generating passive income. Here's a breakdown of how you can use income properties to your tax advantage:

Disclaimer: This blog post is for informational purposes only and does not constitute legal or financial advice. It's essential to consult with a tax professional or attorney for advice specific to your circumstances.

1. Depreciation Deduction One of the most significant tax benefits for real estate investors is the ability to deduct depreciation on income properties. While the property may appreciate in value over time, the IRS allows investors to deduct the cost of the property's structures (not the land) over a set period:

  • Residential properties: over 27.5 years

  • Commercial properties: over 39 years This depreciation can significantly offset rental income, thereby reducing AGI.

2. Mortgage Interest Deduction If you have a mortgage on your income property, the interest you pay on that loan is typically deductible against rental income. This can result in a substantial deduction, especially in the early years of the loan when interest payments are highest.

3. Property Tax Deduction Property taxes paid on your income property can be deducted against rental income, which can further reduce your AGI.

4. Deducting Operating Expenses All operating expenses related to the management, maintenance, and operation of the income property can be deducted. This includes:

  • Utilities

  • Property management fees

  • Repairs and maintenance

  • Insurance

  • Advertising for tenants

  • Professional fees (e.g., lawyer, accountant)

5. Capital Improvements While routine repairs are deductible in the year they are incurred, substantial improvements or renovations that increase the property's value or prolong its life are capitalized and depreciated over their useful life.

6. Carry Forward Losses Real estate professionals or those actively participating in real estate activities may be able to deduct rental losses against other income. If you're not a real estate professional, and your passive losses exceed passive income, you can carry forward these losses to future years. These losses can be used to offset future rental income or capital gains when the property is sold.

7. Consider a 1031 Exchange If you're looking to sell one income property and buy another, a 1031 exchange allows you to defer paying capital gains taxes by rolling the proceeds from the sale into a new property. This strategy doesn't directly reduce AGI, but it can defer taxable gains, which can affect AGI in the year of sale.

8. Installment Sales Instead of selling a property for a lump sum, consider an installment sale, where the buyer pays in agreed-upon installments. This spreads the taxable gain over several years, possibly resulting in a lower AGI in the year of the sale.

Final Thoughts Real estate investment offers myriad tax benefits. By strategically using deductions and tax strategies associated with income properties, you can effectively manage and potentially reduce your AGI. However, real estate tax laws are complex, and the benefits often depend on your individual situation. Always work closely with a tax professional or attorney to ensure you're maximizing tax advantages while remaining compliant with the law.


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