Although the next Tax Day is still far away, taxes are something you want to keep in mind all year long. Why? Well, to benefit from them, of course! Here and there, we’ve mentioned that there are several opportunities for real estate investors to deduct or capitalize expenses. However, today we decided to focus on four of them, and since the year is coming to an end, you may want to hurry and take advantage of its last month!
Like most U.S. tax deductions, real estate taxes are complex. For that reason, the best advice we can give you upfront is to consult with a qualified financial professional. By knowing your business and personal details, they will tailor recommendations and help you pay the least amount possible.
Nevertheless, we gathered some items that can come in handy to start diving into the world of returns and incentives.
1. Opportunity zones
According to the IRS, opportunity zones are “economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” These areas were added to the code by the Tax Cuts and Jobs Act on December 22, 2017, and its main objective is to be an economic development tool.
To take advantage of opportunity zones, investors have to invest their capital gains from selling another investment through a Qualified Opportunity Fund in these communities. Then, they’ll be able to defer having to take a capital gain for the investment until it’s sold or exchanged or until December 31, 2026, whichever comes first. Moreover, they can grow capital gains by 10% if they hold the fund for five years (and 15% for seven years) and even avoid paying capital gains entirely if they remain invested in the fund for 10+ years.
There are currently over 8,700 qualified opportunity zones across the U.S., mostly in low-income neighborhoods (you can see the complete list here). If you’d like to know more about this, make sure to visit the IRS website.
2. Take advantage of 1031 Exchanges
1031 exchanges are a common strategy to reward people who reinvest their real estate profits into new deals. The IRS allows this swap between like-kind properties, meaning “when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type.”
Therefore, you can defer taxes by selling one investment property and using the equity to buy another one (don’t forget that it has to be equal or greater value). You can use 1031 exchanges as many times as you like. However, when you decide to cash out your profits, you’ll have to pay the taxes you owe.
There are several requirements you must meet to qualify for a 1031 exchange. Two of the most important ones are:
- You have to provide a qualified intermediary who has experience handling exchanges, and a description of your replacement property within 45 days of the sale of the original property.
- You have to close the deal of the second property within 180 days of the date of the initial sale (or of the income tax due date for the year in which it occurred, whichever comes first).
3. Deduct your property taxes
This benefit is particularly helpful for landlords. If you own and pay taxes on investment properties, you can use them to balance the rental income said property generates. This is the same as any other business expense, and it can be applied to all your portfolio. Thus, the SALT deductions limitations don’t apply.
4. Deduct business expenses
Lastly, you can deduct your business expenses! And this applies both to expenses tied to operation, management, and maintenance of the land and property and the costs you pay to run your business.
Thus, these are some of the charges you can deduct:
- Property insurance
- Mortgage interest
- Property management fees
- Advertising
- Office space
- Business equipment (like computers and stationery)
- Legal and accounting fees
- Travel
To do so, it’s best to keep detailed records and receipts if the IRS asks for them.
Key takeaways
As you can see, there are several ways in which your real estate business can benefit from taxes! You can combine benefits (like reinvesting your profits from a flip into another house) with deductions (like your business expenses and even your Real Estate IQ subscription!) and make your investments even more profitable.
Do you benefit from taxes in some other way? Let us know in our Instagram account!
Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.
Sources:
- https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions
- https://www.rocketmortgage.com/learn/tax-benefits-of-real-estate-investing
- https://www.thebalance.com/what-is-an-opportunity-zone-5118414
- https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
- https://www.thebalance.com/guide-to-1031-property-exchange-5202369
- https://www.millionacres.com/taxes/real-estate-tax-deductions/real-estate-tax-deductions-guide/
