Strategies to reduce taxes through real estate investing

By Yale Bock, owner and operator of Y H & C Investments

With mortgage interest rates rising to the highest level in over 20 years, investing in real estate may not seem like a wise decision at this time. But if there’s one thing you can count on in today’s economy, it’s that the market will fluctuate. The current high-interest rates shouldn’t deter you from taking advantage of an opportunity to invest in the long-term game of real estate.

Sure, there may not be as many deals right now, but there are still good investments to be found. Investing in real estate remains a highly effective approach for building wealth and reducing taxes. So whether you’re already investing in real estate or looking to get started, one way to get the most out of your investments is to reduce your tax liability. Here are some strategies to help you invest in real estate in a tax-efficient way. 


Real estate is a valuable asset class for investors who want to be more tax-efficient because of the ability to borrow money and have the interest be tax-deductible. Along with mortgage interest, there are many other types of deductions available to investors. Real estate investing allows a buyer to accumulate assets using a relatively small percentage of their own capital with most of it provided by creditors. Simply put, an investor can leverage other people’s money to not only save on taxes through deductions but also increase their wealth through acquiring real estate. 


One such deduction investors can take advantage of is the depreciation deduction. The tax code for depreciable assets is based on MACRS (Modified Accelerated Cost Recovery System). This complex code can be applied in various ways depending on the property, which is why it’s helpful to work with a financial professional with experience applying this tax deduction to investment properties. 

One way tax-efficient investors can use real estate depreciation to their benefit is by applying a method called “cost segregation,” which finds aspects of the MACRS code that segment out different pieces of their building for depreciation deductibility. 


Another strategy to reduce taxes through real estate investing is selling existing real estate assets. This is an area where thoughtful investors can use the tax code to their advantage. For example, residential real estate is exempt from capital gains on the first $500k made from the property sale. For existing business properties, when they are sold, the proceeds are applied to a new property through a 1031 exchange, which is a tax-advantaged structure. 

Additionally, Qualified Opportunity Funds (QOFs) are created to take large capital gains and invest in areas identified by the government as a Qualified Opportunity Zone. By using this type of fund to invest in economically distressed areas, an investor can potentially save on taxes through deferral, discount, or exemption of the capital gains taxes from the sale of an asset.  




This piece is provided as educational information only and is not intended to provide investment or other advice. This material is not to be construed as a recommendation or solicitation to buy or sell any security, financial product, instrument, or to participate in any particular trading strategy.

The discussion of any investments in this presentation is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. The representative investments discussed were selected based on a number of factors including non-performance based criteria. The reader should not assume that an investment identified was or will be profitable. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.