3.8.1. Real Estate
Whether we realize it or not, many of us are already invested in the real estate market because we own a house or vacation home. In fact, the average American has most of his savings invested in the value of his home. Investing in a home offers a significant tax benefit because when you sell your home, any gain in value can be deducted from your taxes up to $250,000, and up to $500,000 for a married couple, as long as you have owned the house for at least two years.
There are other ways that investors can invest in the real estate market. These include buying rental properties or investing in real estate investment trusts (REITs) or real estate limited partnerships (RELPs). For the exam, you should know the pros and cons of each.
When you invest directly in property, you get two potential sources of income: rental income and appreciation in property value. Rental income is any payment you receive for the use or occupation of a property. This includes rental payments, advance rent, and security deposits if they are used for the final payment of the rent.
As far as taxes go, you will need to report all rental income. You are allowed to deduct the expenses you incur in renting the property, such as the cost of repairs and maintenance. This does not include building improvements.
You will also pay taxes on any appreciation in value at the time that you sell your property. The amount of this gain will be determined by the price for which you sold the property, minus the