Real estate investing and ownership comes with many unique and powerful tax benefits.
There are deductions specifically for owning property and deductions for certain corporate structures. The taxation benefits of real estate mean that investors are able to reduce taxable income and keep more of their investment returns.
While it isn’t a good idea to only pick investments based on their tax situation, it is important to understand the tax effects of any investment you might make.
Investing in Arrived will provide tax benefits through two different avenues.
First, it’s a real estate investment. Real estate investments have historically had better tax treatment than other types of earnings.
Second, Arrived investments are structured as a Real Estate Investment Trust (REIT). This gives additional tax benefits that other types of real estate investments don’t get. Specifically, this is what enables investors to benefit from the Qualified Business Income deduction and pass-through taxation. By structuring our homes as REITs, all investors are able to reap the benefits.
Real Estate Deductions
Depreciation is one of the best benefits of investing in real estate. Depreciation is a “non-cash expense”. It doesn’t actually cost you anything – you don’t need to pay a depreciation bill.
Depreciation accounts for wear and tear on the building, and lets you deduct a portion of the buildings cost each year. This means that investors might make money but only show a small gain or even a loss on their tax returns. The tax code considers a single family home to have a useful life of 27.5 years. In reality, the average home lasts substantially longer. This allows real estate investors to benefit disproportionately in the early years of an investment.
Capital gains are when you sell an investment for more than you bought it. Capital gains in real estate work the same way as capital gains in stocks.
When Arrived disposes of the property, investors will capture the appreciation. This rise in value will be taxed at 15% for most investors – significantly lower than tax rates for ordinary income from a job.
Corporate Structure Deductions
Not all companies pay a corporate tax. Real estate investment trusts (REITs) qualify for passthrough taxation. That means that the company doesn’t directly pay an income tax.
Instead, they pass the earnings on to the shareholders (you!). Then the investors pay taxes on the income.
This is a more tax efficient set up than corporations, which are subject to double taxation. These large companies, like those in the stock market, pay a corporate income tax. Then they distribute dividends to their shareholders, and the shareholders have to pay income taxes again.
Qualified Business Income Deduction
The Qualified Business Income deduction, or QBI, is the newest tax benefit for real estate investors. Subject to several limitations, this piece of the tax code allows certain passthrough entities to deduct 20% of their taxable income.
What does that mean? If you earned $100, you would only pay income taxes on $80. That’s a huge tax break. This deduction is the newest, but one of the most powerful.
Arrived and Taxes
How do taxes work with Arrived?
Arrived investors benefit from all of the tax advantages mentioned above. Real estate is already a good investment opportunity, and the tax treatment of real estate earnings is incredibly powerful.
Arrived investors are able to benefit from the tax rules about real estate at every step of the way.
- We depreciate our homes over their useful life. This reduces taxable income by deferring taxes until the property is sold, which can be several years later.
- Then we’re able to use the Qualified Business Income deduction to reduce our income by 20%. This is a massive deduction that Arrived qualifies for by being a REIT.
- Instead of paying a corporate income tax, we distribute nearly all earnings directly to investors each year. This passthrough structure avoids the double taxation issue that comes up with corporations and their dividends.
- Then when the home is sold, the gain from appreciation is a capital gain and is taxed at lower rates than most other income.
What are my tax obligations?
Income from real estate, like all income, is subject to taxation. Arrived uses the tax rules described above, but investors will still need to pay some taxes on the income they receive.
Each January, we’ll send you a 1099-DIV form. This will detail the amount and type of income you received from your Arrived investments. The form will have all the information you need to file your taxes.