Savvy investors look for several government-allowed tax benefits when considering real estate as an investment.
Depreciation: When an investor owns real estate, he/she is allowed to take a flat-line of accelerated depreciation. Say a building has a useful life of 35 years and the owner takes a flat-line depreciation, they would get a deduction of one thirty-fifth (1/35) of the property value each year against income. As long as it’s a “flat-line” depreciation, there is no recovery of the deduction upon the sale of the property; accelerated depreciation would be recoverable.
Appreciation: Properties grow in value over time; the growth in value is not taxed until the property is sold. If held the proper time, the profit is treated as long-term capital gains at closing and receives a favorable tax treatment. There is a program called “1031 Exchange” that would allow the investor to transfer the money from a sale to another property without receiving “constructive receipt” of the money and it would transfer to “tax free.”