Real estate grants are given out by the Federal government and State or Local governments to individual citizens or organizations. These grants are meant to uplift communities or become catalysts for economic development.
Like any other form of assistance from the government, these real estate grants have certain strings attached to them. To get grants, applications need to be filed, and candidates are only chosen if they fall within the narrow or specific brackets set by the government.
However, is there taxation involved here?
Are Real Estate Grants Taxed?
Is there a tax on real estate grants? Well, the truth is a little murky here. In general, there aren’t any real estate grants that you have to pay taxes on. Certain grants translate into loans that require the recipients to pay interest. However, that interest is very minimal, and in some cases, those loans are forgiven if certain requirements are met.
You can reduce the amount of taxes you pay if you take certain grants. The most prominent example is the Low-Income Housing Tax Credit.
Low Income Housing Tax Credit (LIHTC)
This type of credit subsidizes the acquisition, construction, or rehabilitation of affordable rental housing. The target of this credit is low-income and moderate-income tenants. Begun in 1986 as part of the 1986 Tax Reform Act, it has been modified various times since the mid-1990s.
The credit has supported the rehabilitation of more than 110,000 rental units every single year. Over 2 million units have been rehabilitated since it was enacted.
The Tax Benefits of Various Real Estate Grants
The various real estate grants that are used to purchase properties are, for the most part, not taxed. There are specific benefits to using that grant money for tax benefits. Here are certain tax benefits that you can get when you invest your grant money.
Lower Capital Gains Tax
Long-term investments through grants in income properties can yield a lot of profits. While there is usually no tax on real estate grants, the profits you make on any property can fall under long-term capital gains. These are taxed between 0-20%, depending on your income bracket.
If you have invested for the short term, which includes wholesaling or flipping, you won’t realize special tax benefits. Your gains will be taxed at a higher, short-term capital gains rate.
Any grant money used for real estate investment, building homes, or purchasing homes goes toward a depreciating asset. The house breaks down over time. Hence, you can claim depreciation on the property you purchased through grant money. For residential real estate, your real estate investment property can be depreciated over 27.5 years. For commercial buildings, this time period is elongated to 39 years.
If you have used any money, including grant money, to invest in real estate, you can use 1031 Exchange. This is a tool that allows you to defer tax profits that have been made on a sale of real property. This only applies if you purchase another property that is of equal or greater value.
There are certain rules you have to follow for 1031 exchanges. These include:
- The property that is being replaced, and the property/properties bought in its place, has to have similar or greater value.
- You need to identify the property within 45 days and close within 180 days.
- The properties have to be considered “like-kind.” For example, you can’t exchange a house for investment in a real estate investment trust.
- The property that is being exchanged had to have been used for productive business purposes. This can include real estate investment.
- 1031 funds have to be kept by an intermediary. This is for financial safety purposes. The intermediary has to hold onto the funds until the acquisition of the new property is completed.
The changes made by the Tax Cuts and Jobs Act of 2017 have affected the 1031 Exchange. It can no longer be used for investment in properties for personal use.
No Income Tax on Real Estate Grants or Investments
Any real estate grants that the government gives are not considered income taxes. This is because they are for real estate investment and not a business. Hence, there is no earned income to be taxed here. The only exception here is if your real estate building is owned by a holding company that pays you a salary.
Any material participation in the real estate business, however, has its benefits. You can deduct up to $25,000 worth of losses through investment. These losses can be carried forward to future tax periods so that gains are offset in that period.
Opportunity Zone Investments
Under the Tax Cuts and Jobs Act of 2017, the capital gains tax on any property can be deferred. This includes any money that is invested into an investment property in a designated Opportunity Zone. Grant money can be used for this purpose.
The best thing about this benefit is that it doesn’t necessarily have to be gotten through grant money. It can be through money from stocks, commodities trading, precious metals, or even real estate grants.
Bonus Depreciation Benefits
This is a tax benefit that occurs under the Tax Cuts and Jobs Act. Under the benefit, personal property (referred to as chattels), provided with rental units, is eligible for 100% bonus depreciation. This includes appliances like microwave ovens, washing machines, driers, toasters, etc. There is a catch though. The property has to have been put into service after September 27, 2017 through 2022.
All of these items of personal property have to be purchased new or used. They are to be considered “qualified purchases” under the bonus depreciation provision. This is a major asset to both small businesses, real estate investors, or individuals.
These are some of the specific tax benefits of using your real estate grants.
Find a list of government grants for investment properties, here.
Learn about how you can use grants for flipping houses, here.