How Investors Use Real Estate to Lower Taxes

Have you ever thought about how much of your income goes to taxes? Most people don’t realize it, but federal income taxes alone take up a huge portion of their earnings—so much so that the average W-2 employee works nearly half the year just to cover their federal tax bill.

When you factor in state, sales and property taxes, that number climbs even higher. For many, 40% to 60% of their income goes toward taxes, meaning they’re essentially working more than half the year before they start keeping what they earn.

While these tax rates can seem overwhelming, real estate investors have a legal advantage that many overlook: depreciation. The IRS allows property owners to deduct a portion of their property’s value each year, reducing their taxable income and helping them offset high tax rates.

This article explains how real estate depreciation works, why it’s one of the most powerful tax tools available, and how you can use it to lower your taxable income—legally and effectively.

How Depreciation Offsets High Taxes

Depreciation is one of the most effective ways real estate investors lower their tax bills. It allows property owners to account for their investment properties’ natural wear and tear over time.

Since the Internal Revenue Service (IRS) recognizes that buildings degrade and require maintenance, investors can deduct a portion of the property’s value each year from their taxable income.

Let’s say an investor purchases a rental property for $500,000. The IRS allows them to depreciate the building (not the land) over 27.5 years.

If the building’s value is $400,000, the investor can deduct $14,545 per year ($400,000 ÷ 27.5). This reduces their taxable income by $14,545 annually, potentially saving them thousands in taxes.

While depreciation may sound like free money, it isn’t. The government eventually recaptures taxes when a property is sold through recapture tax.

However, this system allows investors to delay tax payments for decades, freeing up more cash in the present to reinvest and build wealth.

For many experienced investors, this means they can legally reduce their taxable income by tens of thousands of dollars per year using depreciation.

Some real estate owners have as much as $90,000 to $100,000 in depreciable assets annually, allowing them to lower their tax liability significantly.

The Long-Term Tax Strategy for Real Estate Investors

One of the most significant advantages of real estate tax strategies is controlling when and how much tax you pay. The goal for many investors is not to avoid taxes entirely but to delay them for as long as possible—often until after their lifetime.

For example, an investor who consistently leverages depreciation and other tax incentives can continue building assets and wealth throughout their lifetime while minimizing the amount of tax they pay in the present.

Their strategy might be:

• Use depreciation and tax deductions to lower taxable income.
• Reinvest tax savings into additional properties to expand their portfolio.
• Minimize capital gains tax exposure through careful estate planning.
• Pass down assets strategically to avoid excessive tax burdens for heirs.

By following these strategies, real estate investors can keep more money in their pockets now while ensuring the IRS gets as little as possible later.

Key Real Estate Tax Terms to Know

Understanding key tax terms is essential for real estate investors looking to maximize their savings and reduce their taxable income. Here are some of the most important terms to know when navigating real estate tax strategies:

Depreciation

A tax deduction that allows investors to reduce taxable income by accounting for a property’s wear and tear over time.

Recapture Tax

The IRS reclaims some of the tax benefits from depreciation when a property is sold. This ensures that investors eventually pay taxes on the income they previously deducted.

Taxable Income

The portion of an individual’s earnings that is subject to federal and state taxes. Depreciation lowers taxable income, which reduces the amount owed to the IRS.

IRS Tax Burden

The total amount of money an individual or business is required to pay in taxes each year. Many investors structure their finances to legally reduce this burden.

Wealth Transfer

The process of passing assets, including real estate, to heirs or beneficiaries in a way that minimizes taxes. Investors often plan their real estate holdings to delay tax payments for as long as possible.

Long-Term Tax Strategy

A financial approach that focuses on legally deferring taxes over time through methods like depreciation. Many investors aim to pay as little tax as possible during their lifetime and structure their wealth to be taxed minimally when transferred.

Take Control of Your Taxes with Real Estate

Real estate provides one of the best legal strategies for offsetting high tax rates. By leveraging depreciation and other tax incentives, investors can lower their tax burden, increase cash flow, and build long-term wealth.

If you want to learn more about how to use real estate to offset your taxes, Mike Schlichte and the team at Absolute Real Estate are here to help. Whether you’re a first-time investor or looking to expand your portfolio, they can guide you through tax-saving strategies that fit your financial goals.

Reach out by filling out our contact form to get started.