They say the only things that are certain in our lives are death and taxes.
But what if we told you that when it comes to real estate investing, you can make taxes work for you rather than against you?
Welcome to the intriguing world of tax-savvy investing, where strategic real estate tactics can not only build your wealth but also shrink your tax bills.
So, how do you go about it?
Let’s go through the top real estate investing tax strategies you need to know about.
Utilize Depreciation
Depreciation is a tax deduction strategy that lets you recover the cost of your investment property over its useful life. Residential rental properties usually depreciate over 27 and a half years. Commercial properties, on the other hand, are depreciated over 39 years.
Not all properties are eligible for depreciation. The property must be used for income-producing purposes to qualify for depreciation deductions. This could include things like rental properties or commercial real estate.
Make sure that you understand the passive activity loss rules. These can limit the ability to deduct real estate losses from other income sources.
However, there are exceptions for professionals who actively participate in real estate activities. Meeting those criteria can help you offset losses against other income.
Don’t Forget Tax Incentives
Tax incentives play a significant role in real estate investing, and they can provide valuable savings when leveraged effectively.
If you invest in affordable housing properties, you may be eligible for tax credits that apply to low-income housing. These provide tax credits over a ten-year period for the development and operation of affordable housing units. See more in Intro to investing.
Tax credits are available for investments in energy-efficient improvements. These improvements can include solar panels, geothermal systems, and energy-efficient windows. The tax credits can help you save on your tax bill while making your properties more environmentally friendly.
Don’t forget to explore tax incentives at the state and local levels. Many states offer their own tax incentives, such as property tax abatements, income tax credits, and grants for real estate development.
If you purchase and use certain types of personal property or equipment for your real estate investment activities, you may be able to deduct the full cost of these assets in the year of purchase using Section 179 deductions.
Look at Capital Gains Taxes
Capital gains taxes are a significant consideration in real estate investing.
Holding onto your investment properties for more than one year can qualify you for long-term capital gains tax rates. These rates typically tend to be lower than short-term rates.
Short-term capital gains are usually taxed as ordinary income, while long-term capital gains rates are often more favorable.
A 1031 exchange, which is also referred to as a like-kind exchange, lets you defer capital gains taxes when you sell one of your investment properties and reinvest the proceeds in another like-kind property.
This strategy enables you to continue building your real estate portfolio without immediate tax liability.
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Capital Expenses
Capital expenses, also known as capital expenditures (CapEx), are costs associated with improving, maintaining, or acquiring real estate assets.
While capital expenses are not immediately deductible as expenses, they can be capitalized and depreciated over time.
Distinguish between expenses that are considered repairs (deductible) and capital improvements (depreciable). Repairs can be deducted in the year incurred. Capital improvements are added to the property’s basis. Then, they are depreciated.
The choice of entity structure for your real estate investments, such as an LLC or S Corporation, can impact how you deduct capital expenses and report income. Consult with a tax professional to figure out the best structure for your situation.
Maintain meticulous records of all capital expenditures, including invoices, receipts, and documentation of improvements. Accurate record-keeping is crucial for claiming depreciation deductions and tax credits.
It can also help ensure that you avoid any mistakes that could trigger financial penalties or legal repercussions.
Plan for the Future
Planning for the future is crucial in real estate investing.
Create a well-thought-out estate plan that takes into account the potential tax implications of passing on your real estate assets to heirs.
Utilize strategies like trusts, gifting, and the step-up in basis. This can help you minimize estate and inheritance taxes.
If you intend to pass down your real estate investments to the next generation, consider creating a succession plan that minimizes estate and gift taxes while ensuring a smooth transition.
Periodically reassess your properties with cost segregation studies to accelerate depreciation and reduce taxable income. This can be especially beneficial as you acquire new properties or make substantial improvements.
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Do Your Research
Real estate investment isn’t a one-and-done process. You’ll need to keep on top of the news to look for new opportunities.
Stay informed about local regulations and zoning changes that may impact your real estate investments. These could include things like new opportunities for development or redevelopment in specific areas.
Join real estate investment associations or forums to connect with other like-minded investors and gain insights into tax strategies and experiences.
Tax laws and regulations can change, so commit to continuous learning. Keep yourself updated on the latest developments in real estate taxation.
Get Professional Help
You don’t have to figure out your real estate taxes by yourself. Accounting firms can help you out with plenty of different tax services for real estate. They can provide advice based on your specific financial situation.
A tax accounting firm can identify and help you maximize deductions related to your real estate investments. This may include deductions for mortgage interest, property depreciation, repairs, maintenance, and property management expenses.
You’ll also want to have legal professionals on hand. If you face tax disputes, audits, or legal challenges related to your real estate investments, a tax attorney can represent your interests.
They can help resolve the issues in a way that minimizes potential financial penalties and consequences.
Use These Real Estate Investing Tax Strategies Today
With these real estate investing tax strategies, you’ll be able to save tons of money in no time. You just need to ensure you have the right support base to help you succeed.
Basta+Croop has the nationwide reach and the local Charlotte knowledge your real estate company needs. Start working with us today.