Investing in real estate can help you build wealth and reduce taxes in a variety of ways. Depreciation, for example, allows for the recovery of costs associated with income-producing, rental property. Investors can defer taxes by selling an investment property and using the proceeds to buy another property with the help of 1031 exchange companies in California. You can also deduct the interest you pay on your mortgages. Continue reading to find out if one or a combination of these strategies is best for you.

Taking Advantage of Depreciation Deduction

The cost of income-producing rental property can be recovered through annual tax deductions known as depreciation. The depreciation deduction is defined by the Internal Revenue Code as a reasonable allowance for deterioration, wear and tear, and obsolescence.

Real estate investors typically use the Modified Accelerated Cost Recovery System (MACRS), which depreciates residential rental property and structural improvements over 27.5 years and appliances and other fixtures over 15 years.

Making Use of 1031 Exchange Services

The 1031 exchange, named after Internal Revenue Code Section 1031, allows investors to defer taxes by selling one investment property and using the proceeds to buy another property or properties of equal or greater value. This exchange must take place within a certain amount of time.

Investors can choose from four main 1031 exchange types of like-kind exchanges. The most common types of like-kind exchange are concurrent, delayed, reverse, and construction or improvement exchange. The best type of 1031 exchange to use is sometimes obvious. More often than not, however, property transactions are quite complex, and it is not always clear how or even if a transaction qualifies for a 1031 exchange.

To know more about it directly from 1031 exchange experts, get in touch with Granite Exchange Services.

Using Home Equity to Borrow

Investors who have amassed significant equity in their personal home or investment property may simply refinance their properties and use the proceeds to make additional investments, improve the home, or for other purposes. Regulations differ from one state to the next.

A lender will typically loan 80% to 85% of your equity. Your credit score, existing debt-to-equity ratio, and debt-to-income ratio will all influence your ability to borrow against your equity.

Mortgage Interest Deduction

On their tax returns, homeowners can deduct the portion of their mortgages attributable to interest payments. These payments are higher in the first few years of the mortgage and gradually decrease as the loan is paid off.

Thus, the recovery of cost through depreciation of income-producing property, the use of 1031 exchange services to defer profits from real estate investments, and borrowing against real estate equity to make additional investments or for other purposes are some of the tax benefits of investing in real estate properties.

For reliable 1031 exchange services, check out Granite Exchange Services today.