Taxes and Real Estate Investing

Getting into real estate investing means becoming versed with how taxes for real estate income works. All in all, there are two important distinctions to make for real estate taxes. What is considered income and what is considered a capital gain.

What is Considered Income Tax for Real Estate Investing?

Any of the following would be subject to an income tax should you earn them from your ventures:

• Dividends paid by REITs or Crowdfunding platforms
• Rent paid by tenants

Active and passive real estate investors can face income taxes from their investments through dividends or rent payments from tenants. If you notice, neither of these are related to the value of the property. The appreciation of a property or any profit you generate from the value of a property is subject to a capital gains tax.

What is Considered Capital Gains Tax for Real Estate Investing?

Any of the following would be subject to a capital gains tax:

• Profit from flipping a home
• Gains from selling a property
• Profit from selling REIT or Crowdfunding shares

Capital generated through these means are direct function of the value of the home. It follows the same principle as selling stocks. If you buy a stock for $1 and sell it for $2, you overall make $1 in profit, and that profit is taxed as a capital gain. Same with a home. If you buy a house for $500,000 and sell it for $700,000, the $200,000 profit is taxes not as income, but as a capital gain.

Final Thoughts on Real Estate Investing

Real estate investing has become more accessible to the broader public presenting viable options for any type of investor. For most people, passive real estate investing will be the best way to go. Representing the lowest barrier of entry, as well as the least amount of work needed, it can be a reliable way for investors to see steady above market returns.

Active real estate investing can be the most lucarative venture for those with the capital – provided they are willing to put in the effort to do diligent research and maintain the property.

If you’re interested in real estate investing and want to learn more, check our Benzinga’s picks for the best real estate investing books or the best online real estate investing courses for this year.