The average effective tax rate for the real estate industry in the U.S. is about 23.2%. This implies that for every $100 of income, a real estate company is required to pay $23.2 in taxes. This constitutes a substantial sum that could alternatively be allocated towards expansion, investment, and various other purposes.
This is why tax planning should be a top priority for anyone with a real estate company. Tax planning involves analyzing the current financial situation and business goals to minimize tax liability. If done right, it can help save money, reduce risks, and improve your cash flow.
This guide explores the benefits of tax planning for your real estate company, especially when you work with a professional. Keep reading more.
Understand Your Industry’s Tax Situation
One of the benefits of tax planning is that it helps you understand your industry’s tax situation and how it affects your business. The real estate industry is subject to various types of taxes. Each has its own rules, rates, exemptions, and deductions that you need to be aware of.
For example, income tax is based on your net income from your real estate activities. This may include rental income, capital gains, commissions, fees, and interest. Property tax is based on the assessed value of your properties and the local tax rate.
Sales tax is based on the sales price of your properties and the state and local sales tax rates. Excise tax is based on the value or quantity of certain goods or services that you provide or consume, such as fuel or electricity. Transfer tax is based on the value or consideration of your property transfers and the state and local transfer tax rates.
Understanding these types of taxes and how they apply to your business allows you to plan and avoid surprises. You can also identify opportunities to reduce taxable income or increase deductions by taking advantage of the available tax laws and incentives.
Optimize Your Business Structure
Another benefit of tax services for real estate is that they can help you choose the right business structure. Some of the common business structures in real estate include sole proprietorship, partnership, partnership, and LLC. Each offers distinct advantages and disadvantages for liability, income tax rates, and more.
For example, sole proprietorships and partnerships are considered pass-through entities. This means that the business income and expenses are passed through to the owners. They are also taxed at their individual income tax rates.
This can be beneficial if the owners are in a lower tax bracket than the corporate tax rate. However, this also means that the owners are personally liable for the business debts and liabilities.
Take Advantage of Available Tax Credits
Tax planning also allows you to take advantage of available tax credits and incentives. There are several tax credits at the federal, state, and local levels that real estate companies can qualify for. This can greatly reduce your tax liability and increase your profit margins.
A good example is the Low-Income Housing Tax Credit. It can be beneficial for those who invest in the rehabilitation or construction of low-income housing. The Investment Tax Credit can offset the tax liability for those who install solar panels on their properties.
There are also property tax exemptions, abatements, and deferrals available in some areas. Some states and cities even offer incentives for real estate projects that align with their growth goals.
The key is identifying which tax credit programs you may qualify for. Be sure to work with reliable tax services to take the necessary steps to capture the credits. The dollars saved through tax credits go directly to your bottom line.
Maintain Proper Recordkeeping
Proper recordkeeping is a critical component of tax planning and compliance. As a real estate company, you must keep detailed records of all income and expenses. This includes documentation like:
- Those that show the amount and nature of your income and expenses including receipts, invoices, bills, leases, deeds, titles, and closing documents
- Documents that summarize and organize your income and expenses including bank accounts, ledgers, journals, and registers
- Forms, schedules, worksheets, and other documents that help you prepare and file your tax returns
- Notices, letters, emails, phone calls, and other records that communicate with the IRS or other tax authorities
Detailed records make it easy to calculate deductions, income, and profits/losses each year. They also provide evidence for your tax positions in case of an audit or dispute.
Time Income and Deductions Strategically
Another benefit of tax planning is that it allows you to time your income and deductions. This means that you can control when you recognize your income and expenses for tax purposes and influence your taxable income for a given year.
For example, let’s say you expect to be in a higher tax bracket in the current year than in the next year. You may want to defer some of your income to the next year and accelerate some of your deductions to the current year. This allows you to lower the taxable income for the current year and pay less taxes at a higher rate.
There are different ways to time your income and deductions strategically, depending on the type of income and expense. For example, control when you receive rental income by choosing when to collect rent or sign new leases. Time capital gains by deciding when to sell properties.
Choosing when to pay for expenses like repairs, insurance, and taxes can impact deductions. Timing is everything and allows real estate agents to optimize cash flow while reducing tax liability for each year. This is something a reliable accounting firm that’s well-versed in taxation in the real estate industry can help with.
Get Started on Tax Planning for Your Real Estate Company
Paying taxes is a legal requirement for every real estate company. Yet, that doesn’t mean there aren’t ways to maximize savings and minimize your tax burden.
That’s where Basta+Croop comes in. Our team is ready to help with all your tax planning needs. We stay up-to-date on the latest regulations, incentives, credits, and strategies to benefit your bottom line. Schedule a consultation to discuss how we can optimize your tax situation and keep more profit in your pocket.