Tax Credits for Real Estate Investing

by Tara Thomas ; Updated March 15, 2018

Real estate investing can be quite lucrative, especially if you take advantage of IRS tax credits available specifically for real estate investors. These real estate tax credits vary depending upon different factors, but all go toward reducing your tax bill when the times comes to pay Uncle Sam. While some real estate tax credits require the property to be your primary residence, several are available for commercial builders and investors to increase a property’s profitability.

Understanding Credits and Deductions

Both tax credits and deductions impact how much you ultimately end up owing the IRS come tax time in different ways. Tax credits directly reduce the amount of taxes you owe on a dollar-for-dollar basis when you file your return. Government agencies typically use tax credits to incentivize taxpayers or certain industries and to stimulate economic growth. You may be eligible to claim these tax credits for items ranging from continuing education needed for your work to real estate investments and property improvements. A deduction, on the other hand, reduces the amount of income you can be taxed on, which can result in lowering your overall tax obligation.

Federal Energy Tax Credits

One popular tax credit is the federal energy efficient tax credit, which was extended through December 31, 2016. Although this tax credit has expired, you may still claim it for any taxes you file for qualifying properties built or largely completed on or before this date. This tax credit of up to $2,000 incentivized builders to construct energy-efficient homes under the federal Energy Policy Act of 2005. Manufactured homes are also eligible, and all homes must be built to comply with the Federal Manufactured Homes Construction and Safety Standards. Use Form 8902 to claim this real estate tax credit for tax year 2016.

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Investment Tax Credit

The investment tax credit is available to property owners who rehabilitate and make improvements or energy-efficient upgrades to a property. While there are many investment tax credits available, two are especially popular among real estate investors. These include the rehabilitation and business energy tax credits.

The rehabilitation tax credit applies to aging or historical properties that have been restored, rehabilitated or otherwise substantially upgraded. Typically, you can claim 10 percent of the costs associated with the restoration or rehabilitation of a property in use before 1936 and up to 30 percent of the costs of restoring or renovating a qualified historical building.

Solar Tax Credit

Real estate investors can claim the business energy credit, also known as the solar tax credit, for qualifying commercial or residential properties. Many factors are considered to determine eligibility for this tax credit, so it’s wise to consult with a qualified tax professional or visit the IRS’ website for more information. Residential and commercial property owners receive a 30 percent credit for qualifying properties that have begun construction through 2019. The solar tax credit drops to 26 percent in 2020, and in year 2021, the credit drops once more to 22 percent. For year 2020, the residential solar tax credit drops to zero and the commercial credit remains at a permanent 10 percent. To claim this tax credit, you file Form 3468 for commercial investors or Form 5695 for residential taxpayers.

About the Author

Tara Thomas has been a writer and traveler since 1997. Her articles appear in various online publications. She also has experience authoring grant proposals for a Southern California marine science laboratory, which helped her develop a lifelong interest in environmentalism. Thomas is an event planner, has a Bachelor of Science in marine biology from California State University, Long Beach, and worked as a mortgage consultant since 1998.

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