Real Estate in the United States

The US real estate market offers diverse opportunities for investors, from residential single-family homes to commercial properties. This guide covers the tax treatment of real estate investments, financing options, operating considerations, and exit strategies.

Property Types

• Single-Family Homes: Most accessible for individual investors
• Multi-Family Properties: Duplexes to large apartment buildings
• Commercial Real Estate: Office, retail, industrial, hospitality
• Real Estate Investment Trusts (REITs): Publicly traded or private
• Vacation Rentals: Short-term rental properties (Airbnb/VRBO)

Tax Treatment of Rental Income

Rental income is taxed at ordinary income rates. Landlords can deduct:

• Mortgage Interest: Fully deductible against rental income
• Property Tax: Fully deductible (no SALT cap for rental properties)
• Depreciation: Residential buildings depreciated over 27.5 years (3.636% annually)
• Operating Expenses: Repairs, maintenance, insurance, property management, utilities
• Travel: For property management visits

Capital Gains on Real Estate

• Primary Residence: Up to $250,000 ($500,000 MFJ) gain exclusion (2-of-5-year rule)
• Investment Property: Depreciation recapture taxed at 25% maximum; remaining gain at 0/15/20%
• 1031 Exchange: Tax-deferred exchange of like-kind investment property
• Installment Sales: Spread gain over multiple tax years

Financing

• Conventional Mortgages: 15-30 year fixed or adjustable rate
• FHA Loans: Lower down payment (3.5%) for owner-occupied
• VA Loans: Zero down payment for eligible veterans
• Investment Property Loans: Typically require 20-25% down payment
• Commercial Loans: Terms vary by property type and business plan

Landlord Responsibilities

• Maintain habitable premises (implied warranty of habitability)
• Comply with building and housing codes
• Return security deposits (less allowable deductions) within timeframe set by state law
• Provide proper notice before entry
• Follow eviction procedures per state law

Real Estate Taxes at Sale

When selling real estate, sellers may be subject to:

• Federal Capital Gains Tax: On any gain after basis adjustments
• Depreciation Recapture: 25% on accumulated depreciation
• NIIT: 3.8% on investment income for high earners
• State Transfer Taxes: Vary by state (typically 0.1-2% of sale price)