Real Estate Investor Magazine South Africa December/ January 2018/2019 | Page 42

FINANCE
Tax Benefits
of Real Estate Investing
BY TOM WHEELWRIGHT
A
ll governments use the tax law to encourage investing
and other activities. They want to encourage business
development and growth so they give businesses tax
deductions for their expenses. They want to encourage research
and development, so they give extra deductions and/or credits
for increasing research and development. In South Africa, for
example, businesses receive a deduction equal to as much as
150% of the research expenditures. They want to encourage
individuals to have and take care of children so they routinely
give tax deductions and credits for children and education.
The biggest tax benefits are reserved for real estate investors.
Worldwide, investment in real estate, particularly in new
developments, receive the single biggest tax benefit available
commonly called depreciation or cost recovery deductions.
Most people, when they invest in real estate expect the real
estate to appreciate. While there is some wear and tear, they
expect the real estate to last for many, many years and continue
to increase in value.
Despite the obvious increases in value from good
development, real estate investors commonly receive a
deduction against their taxable income as if the real estate
were actually going down in value. This incentive is called
depreciation or cost recovery. Here’s an example of how it
works.
An investor decides to buy land and build a new apartment
or office building. The building costs $1 million to build. The
investor makes a down payment of $250,000 and borrows
the rest from a bank. Once the building is placed in service,
the investor can begin taking a depreciation or cost recovery
deduction. This deduction can range from $25,000/year (40
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DECEMBER 2018/JANUARY 2019 SA Real Estate Investor Magazine
year depreciation) to as much as $300,000 in the first year
(100% for certain property, such as the contents of the building
and land improvements). In the latter case, the investor is
receiving a deduction in the first year for more than their
entire down payment. The bank doesn’t receive the tax benefit
from depreciation; that’s reserved for the investor.
There are other tax benefits as well. Some countries allow
investors to postpone any gain when they sell the property if
they buy another property. Certain countries have additional
tax benefits for building in distressed areas, often called
opportunity zones or economic development zones. In these
cases, the gain from sale of the building may be entirely
eliminated rather than merely postponed. Many countries
give tax credits for developing low-income housing or for
rehabilitating historic structures.
The United States now gives major depreciation benefits for
acquisitions of used property as well. A rental property in the
U.S. can be depreciated over and over again by each new buyer.
The goal of these tax benefits is to encourage real estate
investing, especially in new developments. Most real estate
investors are aware of the great benefits from using debt
(leverage) to buy and develop real estate, They may not realize
that they are not just leveraging their cash-on-cash returns
when they borrow to build, they are also leveraging their tax
benefits.
SOURCE: Wealthability.com; Tom Wheelwright is a CPA based
in Phoenix, AZ, USA. He is a best-selling author of Tax Free
Wealth