Real estate investing has many financial benefits for the investor. Some of these benefits include getting additional income from rent, growing your wealth for the long term, and securing your future. But aside from these apparent benefits, a smart investor must know that real estate investing also offers hidden benefits, one of which is tax-saving opportunities.
You can significantly benefit from some tax deductions and even pull in some refunds by investing in real estate. Unfortunately, many people are unaware of the tax benefits that accrue to them from their real estate investments. This is the case because the IRS would not advertise the tax benefits for all to see. Moreover, filing taxes can be generally complicated, and IRS regulations can seem quite difficult to keep up with.
The strategies needed to take advantage of real estate tax benefits require in-depth knowledge and research for each specific scenario. This is why it is advisable for you to hire a CPA (Certified Public Accountant) or tax advisor to ensure that you are not in crosshairs with the IRS and your wealth is not swept away by endless tax obligations.
As a real estate investor, here are the top 5 strategies that would minimize your tax burden and benefit you greatly.
- The 1031 Exchange
When you make a profit from the sale of a property and reinvest that profit into buying another property, this allows you to defer the deductible tax on that profit.
However, for the 1031 Exchange to be applicable, note that the property being repurchased has to be similar in value to the one you sold; otherwise, the capital gains tax would still be deductible. Also, the new purchase must be an investment and not personal property. Therefore, it is crucial that you consult a CPA to clarify whether the 1031 Exchange applies to your investment per time.
- Long-term Capital Gains
As a real estate investor, another strategy to help you enjoy tax benefits is holding on to your property for a more extended period. While buying and selling off instantly looks pretty lucrative, it attracts a heavy tax obligation. However, if you do not resell for up to a year, you can avoid the hefty tax from short-term capital gains, which can be as high as 35%.
In addition, while the IRS is mandated to tax your capital gains (which is the profit made from selling a property), the tax burden is considerably lower when the asset is held for a long time, depending on your tax bracket.
- Self-Directed IRA
An IRA is an Individual Retirement Account that allows individuals to save their resources towards retirement–think of it as an account you fall back to at old age. The holder of the IRA is unable to make a withdrawal from the IRA before the age of 65.
However, this can be waived if the IRA holder invests in real estate and returns the profit from the investment into an IRA. This strategy is beneficial because it gives the IRA holder access to funds for real estate investment. It also offers the tax treatment deductible from an IRA (which is lower).
- Business Tax Deduction
Owning a property is as good as owning a business. By owning a property, you already incur some cost in running that property. These costs are already taxed, meaning they cannot be taxed again at the end of the financial year. This is known as business tax, and it can be erased and written off if necessary conditions are met.
- Depreciation
This tax-saving strategy particularly applies to you if you are a rental property owner. The idea is that the property’s value depreciates with wear-and-tear from usage or even obsolescence of non-usage. The IRS posits that once your rental property is placed in service, it begins to depreciate. And the investor can recoup some costs of improvement (as well as original acquisition cost) by reporting depreciation to the IRS through the proper channels.
In conclusion, these strategies are beneficial to note if you would like to realize some good returns from your real estate investments and navigate the heavy burdens of income tax. With the help of a top CPA, you can work with the best strategies for your investments.
It is also essential to keep track of your expenses and all relevant tax documents throughout the year to meet all the possible conditions from the regulators.
Headed by Shauna A. Wekherlien (CPA, Masters in Taxation, and Certified Tax Coach), Tax Goddess is a tax and accounting firm that specializes in tax reduction, audit assistance, and accounting services. As a top 1% CPA in the US, what sets us apart from other CPA’s is our cutting-edge system in which our team of professionals, we are a team of experienced tax professionals who will work with you to develop a customized plan to reduce your taxes while creating the most-effective financial plan possible.
Over the past twenty years, we have helped individuals and business owners from across the US keep more of their hard-earned income by saving a total of $423,984,402 and counting.
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