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Investing in real estate has many benefits, including portfolio diversification, the potential for passive income, and owning a real, tangible asset.

But you may be surprised to know about all the tax benefits that come with owning investment property. These can add up fast over time, so it pays to know what they are when deciding on whether to invest in real estate or not and which properties to buy.

Here’s a list of the top 7 tax benefits you stand to gain by investing in real estate: 

• Deduct property expenses

Since the Internal Revenue Service (IRS) sees being a landlord as running a type of business, you can write off all kinds of property expenses. For example, you can deduct property taxes, mortgage interest, property insurance, property management fees, building maintenance, repairs, landscaping, pest control, utilities, and more.

On top of that, you can write off more traditional business expenses related to your real estate investments like advertising and marketing, office space, office equipment and supplies, legal and accounting fees, and travel. 

All of these deductions will lower your taxable income, which could translate into a pretty penny when all is said and done. And if you choose to house hack your primary residence, you could compound the tax benefits of investing in real estate by deducting many of your living costs.

Just make sure to keep detailed records and receipts of all the things you write off in case you ever get audited by the IRS.

• Benefit from long-term capital gains

Capital gains refer to the increase in value that an asset gains from the time you buy it to the time you sell it. For instance, if you buy a house for $300,000 and later sell it for $400,000, your capital gains would be $100,000. 

The IRS taxes capital gains, including capital gains on real estate investments. However, the IRS makes a distinction between short-term and long-term capital gains. Short-term capital gains are any gains on property sold within a year of purchase. These are considered regular income and therefore taxed according to your marginal tax rate (or tax bracket).

Long-term capital gains are gains from investments that are held for over a year. Unlike short-term capital gains, long-term capital gains aren’t considered regular income and are taxed at a much lower rate: 0%, 15%, or 20% depending on your income. So if your income is low enough, you could potentially pay no taxes at all on your long-term capital gains.

If you are a buy-and-hold real estate investor, the tax benefits of long-term capital gains are huge.

• Write off property depreciation

Everyone knows that properties depreciate through wear and tear, but few people know that you can write off depreciation in your taxes. Here’s how it works: 

The IRS sets the expected life of a property to 27.5 years for residential homes and 39 years for commercial properties. If you take the total value of a property at the time you bought it and divide that number by the relevant years above, you can deduct that amount each year as depreciation. 

For example, if you buy a single-family house for $300,000 and divide that value by 27.5 years, you get $10,909. You can then deduct $10,909 in depreciation from your rental income each year. So if you make $24,000 in rental income from the house each year, your taxable income would drop from $24,000 to only $13,091. That’s huge!

That said, you can only write off the depreciation of the real property and not the land since land doesn’t lose its value through wear and tear. Also, keep in mind that if you ever sell the property, your capital gains tax will be based on any increase from the depreciated—not the original—value. This is known as depreciation recapture. 

• Defer capital gains tax with a 1031 exchange

Another way to save on taxes with real estate investing is by taking advantage of 1031 exchanges. A 1031 exchange allows you to defer paying capital gains tax (and depreciation recapture) when selling a property by rolling over any profits into a new property. 

So long as you buy a property of equal or greater value and of similar nature (e.g. residential vs. commercial) as the one you sell, you can swap the old for the new for tax purposes. In other words, you won’t have to pay any capital gains tax until you sell the new property. 

If you keep using the proceeds from property sales to invest in new properties, you can even do 1031 exchanges indefinitely. In fact, you can avoid paying capital gains tax altogether if you pass your final property on to an heir. At that point, the cost basis for the property is updated to its current market value and any capital gains or depreciation recapture tax liabilities are eliminated for the heir.

Keep in mind, however, that you must meet several criteria to qualify for a 1031 exchange. For example, the replacement property must be identified within 45 days, and it must be purchased within 180 days. The full list of rules is complex and can get confusing fast, so you may want to consult a licensed tax professional before going this route. 

• Get tax breaks by investing in opportunity zones

The 2017 Tax Cuts and Jobs Act gives tax breaks to those who invest in areas designated by the US Department of Treasury as low-income and disadvantaged, also known as “opportunity zones.” 

As a real estate investor, you can choose to put your unrealized capital gains into a Qualified Opportunity Fund that helps improve an opportunity zone. The longer you keep your money invested, the less you’ll owe in capital gains tax. And if you stay invested for over 10 years, you can avoid paying capital gains tax altogether!

• Avoid FICA taxes

Real estate investors can also avoid paying FICA taxes. FICA (which stands for Federal Insurance Contributions Act) is a federal payroll tax that funds the Social Security and Medicare programs. When you work for an employer, they pay half of the tax for you (you pay 7.65% of your gross wages and they pay 7.65%). But when you work for yourself, you're on the hook for the full 15.3%. 

However, since rental income isn’t considered earned income, real estate investors don’t have to pay any FICA tax on their earnings at all. You can keep it all to yourself.

• Qualify for a pass-through deduction

Under the Tax Cuts and Jobs Act of 2017, real estate investors can qualify for a 20% deduction on any Qualified Business Income (QBI). QBI is any pass-through income from partnerships, LLCs, S corporations, and even sole proprietorships. Though restrictions apply, you may be able to deduct a fifth of any passive rental income from your tax liability. Consult a tax professional to find out if you qualify. 

The bottom line

Now that you know all the different ways real estate investing can lower your tax bill, it’s time to give it a try. When you add up all the tax benefits over time, you’re looking at a huge amount of savings. The key is to keep good records. That way, you can apply for various deductions when tax season comes and always be ready for a tax audit.