Today I continue to explain why I’m investing in real estate over stocks. This post goes into the powerful tax benefits of rental real estate.

This page may contain affiliate links.
Part of the “Road to Rental Real Estate” series.
This is a follow up post to Part 1. This multi-part post discusses why starting this year, I’m sinking more of my capital into real estate as my preferred taxable investment class. This post goes into the powerful tax benefits of rental real estate.
If you haven’t read Part 1 yet, please take a second and check it out.
What about retirement accounts?
I’d like to be specific that the money I’m putting into real estate is left over from my paycheck after I’ve fully filled up my tax deferred retirement accounts. This includes a 401(k) for me, a 457(b) and 403(b) for the Dr-ess, and backdoor Roth IRAs for the both of us.
I’m not going to pass up that sweet tax deferred (or tax free) investment space!
So the money I’m using for real estate is the cash that otherwise would go into my taxable Vanguard brokerage account.
My financial plan, which outlines my 15 year plan to financial independence, has us saving about $5000 a month towards this purpose this year.
As I mentioned in Part 1, real estate investing has major advantages as an investment vehicle. In this post, I’m going to focus on some of the tax advantages.
Boom, you’ve got a business!
One thing that became clear from my ongoing education about taxes is that the US rewards business owners and real estate investors more than “mere W2 employees”.
At a high level, this makes sense. The government uses the tax code to encourage or discourage various activities, and the IRS is their way of enforcing these policies.
The economy doesn’t function without businesses producing services and goods. Businesses sell their products and employ people, creating more revenue and income that the IRS can then tax. It’s a symbiotic relationship.
Likewise, investment into real estate ensures housing stock is available for everyone to live in. It also ensures that there are buildings where all of the precious businesses can operate.
So if you want favorable tax treatment in the US, it’s time to start a business.
“But I don’t want to start a business!” you might be saying to yourself. “That sounds difficult and scary!”
Well I have good news for you: If you purchase rental real estate, all of a sudden, you’re a business owner! Boom. No late nights or sales experience needed.

As a new business owner of rental real estate, you have access to some incredible deductions.
Let’s start out with one of the most powerful deductions as a real estate investor.
The “stuff wears out” deduction
“Depreciation” is the concept that property “put into service” for business purposes wears out. So every year, some percent of its worth can be deducted against your income from the property.
The Tax Cuts and Jobs Act of 2017 kept this depreciation period as 27.5 years for residential real estate. That means that every year, 1/27.5 of the value of your rental building can be deducted from the income generated.
This deduction is pretty huge. The IRS tries to “recapture” 25% of this money if you sell the property, but you can avoid this with something called a 1031 exchange.
Mortgage interest
Just like the interest on your primary home can be deducted (up to a limit) on your annual taxes, mortgage interest on your rental properties can be deducted as well!
Especially in the beginning of a new mortgage, this means that the majority of the mortgage payment can be deducted from the property’s income.
Keep in mind that in properly selected rental property, your tenants are the ones paying off your mortgage.
Operating expenses

You can also deduct almost everything else related to keeping the rental property running, including:
- Property management costs
- Repairs and upkeep
- Travel related to your rental property
- Insurance
- Legal and professional services
- State and local real estate taxes
If you have any actual rental income after all of these deductions, you might be able to also take advantage of the “pass through” deduction. Between 2018-2025, this lets you deduct 20% of your rental income if you meet certain income criteria.
It’d take a genius to invest in real estate and pay taxes.
Fortney Stark, House Ways and Means Committee, 1986.
Conclusion
Even though you can make a substantial return from investing in rental real estate, after all the deductions, you might show very little income or even a “loss”!
In Part 3 of the series, I’m going to discuss the power of leverage to super-charge your returns on real estate.
This will be followed by an analysis of a real property that I’m purchasing, including my expected returns. Later on, I’ll give reports on the property to see if reality matches my projections.
–TDD
Comment, share, and subscribe!
Want to support the blog?
- Subscribe to my weekly newsletter!
- Comment on my posts (I love reading these!)
- Visit my Recommendations page
- Check out my wife’s food blog: Eat Dessert First
- Stay at our Luxury Cabin in Broken Bow!
- Accelerate your journey to financial independence!
Great highlights of what sold me on real estate ownership as well.
I max out all my tax deferred accounts (401k, HSA, IRA) with stocks/bonds/reits and all the other money I get I pour into real estate since May 2017.
Thanks so much Xrayvsn! I’ll have to check out this contacts page issue, and will put some social sharing icons as well. I thought I had this already in there, but I guess not!
I think these were both victims of the WordPress update to Gutenberg.
— TDD
Would you still invest in real estate if the market is over valued? That’s the tough part for me to get into rental property investment in Vancouver when our real estate is already very expensive.
Hi Tawcan, this is a great question.
I’m in a similar situation. I live in Los Angeles, where rent doesn’t even come close to covering the costs of the debt service on rental property.
My solution is to purchase out of state rental property. There’s a lot of debate on this, and I definitely will be discussing this in the future.
Many real estate investors want to be able to drive to their property to keep an eye on it. My rental purchase will be in Alabama, which is a 4 hour plane trip.
I’ll be documenting this whole process here on the blog. Feel free to subscribe to the email list so you can see how this turns out!
Thanks for stopping by.
— TDD
Thanks so much for sharing your success!
I can identify with living in souther California as I am in the Palm Springs area.
If investing in real estate out of state, how do you learn about the opportunties and decide which are most appropriate even though you may be a 4 hour plane ride away?
Thanks, again!
Hey Alta, good question! The short answer is education, from blogs, podcasts, books, investing courses and site visits. I visited Indianapolis twice before I bought my first duplex there. I also took a real estate investing course: Review of the Semi-Retired MD’s Real Estate Investing Course
I bought 4 units prior to the course, so it wasn’t a necessity, but I do credit it for accelerating my journey to moFIRE significantly.
Good luck!
— TDD
[…] Check out this post for an overview of the tax benefits of real estate investing. […]