For many people, owning real estate is a vehicle to accumulate and build wealth. Whether they own two single-family units, a string of properties, or a few condos by the coast, real estate investors should consider tax planning and tax strategies as part of their arsenal for improving their returns. Investing in real estate is hard work and you don’t want to skip doing the homework for maximizing your earnings because you lacked a strategy or hired a bad CPA.
Getting a professional accountant in your corner is a wise move.
There are several structures in place that benefit real estate investors. Understanding the constant changes and modifications to these, however, is no small task. It requires planning, strategizing, and making the right moves at the right time.
Let’s delve into the specifics.
Tax Planning Helps Real Estate Investors Save
Planning and preparation are the keys to a successful tax year. Dreading the impending tax deadline does no good. Of course, as a real estate investor, you are a go-getter, a proactive over-achiever and this means you tackle things with tenacity and confidence, so you’re ready to find out more. A trusted CPA helps you on the journey to protecting, securing, and maximizing your investments.
There are several strategies for tax preparation as a real estate investor. Not all of them may apply to you and not all of them will reap rewards in your particular situation, but they are worth looking at. The five most often discussed include:
- The Business Tax Deductions
- The 1031 Exchange
- Depreciation losses
- IRAs
- Long-term capital gains
Other planning considerations include things like capital improvements vs repairs and maintenance, passive losses, ins and outs of depreciation, and more.
The Famous 1031 Exchange
Experienced real estate investors will be familiar with 1031 exchanges, but if you’re just starting out, this concept might just be opening up to you. This is a common tax strategy that boosts portfolio growth and increases net worth faster. This strategy was put in place in the Revenue Act of 1921 to avoid taxation of ongoing investments and encourage reinvestment.
The key here is that the property is of “like-kind,” meaning that the property is of equal or greater value and is used for trade or business. So this type of tax strategy allows real estate investors to boost their buying power and grow their portfolios. This tax strategy, however, is highly dependent on timeliness and scoping out the right properties.
Digging Into Deductions & Other Breaks
Real estate is a popular form of growing wealth, and therefore offers substantial tax incentives and tax breaks. Deductions are one of the biggest forms of tax benefits and refer to tax write-offs. As a property manager, for example, ordinary expenses of maintaining, managing, and conserving the property can be categorized as business expenses. Repairs, such as roof leaks, painting, etc. can also be deducted, but there is a tax difference between repairs and improvements.
The Act of Depreciation
Write-offs from depreciation can impact a property owner’s tax bill. Thanks to this tax deduction, a real estate investor can recoup some of the cost of a real estate investment. In other words, the tax law allows the real estate investor to write off the natural depreciation of the structure.
It is filed as a type of deduction that—in the end—can reduce the amount of a tax bill. And while on its face depreciation sounds easy enough, the IRS is pretty particular about this tax deduction and should thus not be taken lightly.
The IRS has set rules about which rental properties are classified as depreciable. Most rental property investors can include depreciation as an expense on Schedule E when they do their tax filing.
Consider Capital Gains
Capital gains tax refers to the taxes placed on a property that is bought and sold for profit. The profits are taxed differently and the amount of time the investor held on to that property comes into account. For example, homes held for more than a year will be taxed at long-term capital gains tax rather than short-term.
For real estate investors who are into house flipping, this can sometimes be a fragile game of timing and balance. So, depending on the circumstances, it may be wise for an investor to hold onto a property for more than a year. Your CPA can further help you assess the benefits.
Want to Learn More About Tax Strategies for Real Estate Investors? Contact AB Tawil CPAs
The above is merely scratching the surface when it comes to understanding tax filing for real estate investors. There are a lot of other questions that come into play: How do I know the difference when a repair should be classified as an expense or capital item? What loan costs are deductible? And other questions about selling a property, buying a property, and more.
Don’t take a chance with your investments. Want to learn more about tax strategies when investing in real estate? Call AB Tawil today and speak to someone on our team.
