Equity in real estate is a relationship concerning how much you owe on your mortgage and the amount your property is worth. Every time you pay your mortgage your equity grows because the amount you owe decreases. Coupled with appreciation, your equity in the property grows with the length of time you own it. If you rent the property then the rent should cover your mortgage and your equity grows without you having to do anything, as you continue to cash flow.
Even homeowners who aren’t investors reap the benefits of appreciation. Nowadays the accepted rate of appreciation in the U.S. is 3% annually, although this percentage can be much higher in more populated areas. There are several reasons homes appreciate. The first is that as building materials become more expensive, the price of new homes continues to increase this shifts the demand in the used home market in a homeowner’s favor. The second reason is that there is only a fixed amount of land. As more and more land is developed and used up, the price of it increases because there is less available. This particularly applies to places where lots of people want to live- like big cities.
Another little known perk to real estate investing is that tax laws are actually written in favor of real estate investors. The following tax benefits of real estate investing are applicable to most investors but to realize full benefits you should consult a tax professional. Most operating expenses that you acquire can be written off, making your profits appear less and reducing your tax burden. We’ve addressed the fact that real estate usually appreciates- but most of the time it is the land beneath the actual building that is appreciating, not the structure itself. Because of this you can deduct the depreciation of the building from your taxes and as a result pay less. Finally, the capital gain you realize when you sell a property is taxed by the IRS., but the tax code allows you to defer the payment of this capital gains tax if you are using it to buy a similar investment property.
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