Finding ways to manage your tax burden as an investor is never an easy task. No matter how much you research or how much you strategize, you are likely to find the complexities of managing your tax burden an ever-shifting obligation. It gets more complex if your business involves real estate investments, and while there are a lot of opportunities in real estate, tax planning is essential. If you know how to operate efficiently, you can more easily minimize your tax burden. Read on for more practical strategies, and find out how tax planning for real estate investors works.
Remember That Your Home Is A Tax Shelter
The house you live in has a few tax benefits from the moment you make it your home or primary residence. This is vital information because it is possible to occupy houses in the process of improving them, which provides you with the opportunity to deduct mortgage interest. In some areas, it even provides you with a property tax credit. There are limitations to the use of this strategy, so unless your improvements will take a long period of time, it might not work for every situation. Even so, the opportunity to invest in your own permanent home as a tax haven is always available when you work in real estate.
Remember, when it comes to your home, the IRS does not tax the first $250,000 of the profit if you are single, and the benefit doubles for married couples. This alone makes improving homes and moving regularly a potentially lucrative investment strategy.
Choose Your Investment Strategy Carefully
This might seem like general advice, but it really isn’t. While it’s always true that investments require careful decision-making, strategic investment is different when you are trying to minimize your tax obligations. For starters, remember that the timing of your investment and subsequent sale can affect the tax year that it falls into. This means that you might benefit from holding properties a little longer than you otherwise might if it pushes the tax obligations to the next quarter or the next year. This can help you control the amount you must allocate in taxes each quarter.
Certain kinds of investments are also incentivized with tax breaks and other opportunities at the federal, state, and local level. By selecting investments that take advantage of these opportunities, you can easily shrink your tax burden while growing your investment portfolio.
This is also called a 1031 exchange. This means that if you are rolling the proceeds of one sale into another property, you can defer the tax payments on your profit from the sale. This is a really useful strategy, because you can continue rolling profits over in a chain, buying ever more expensive properties with the proceeds. You do have to break the chain to get your investment back, at which point you will be on the hook for the taxes. In the meantime, though, the 1031 exchange allows eligible investors to basically get a zero percent loan in the form of that tax deferral.
Business Tax Strategies
It’s important to remember that your real estate investment business is a business. The income taxes you pay on your profits use the same Schedule C form as an entrepreneur who, say, runs a convenience store. That means you have the opportunity to use the same strategies other small businesses use to minimize their tax burdens. That includes all of the following:
- Itemized deductions for business expenses including home office space, technology expenses, marketing, and other related business expenses
- State and local tax incentives aimed at small businesses and local investment
- Tax deferral and payment programs designed for small businesses
- Credits designed to spur business investment or to offset the cost of property taxes
If you have any family members working for the real estate business, you want to make sure you pay them, and these expenses will be able to be worked into your overall tax plan. This allows your family to get money out of the business as personal income, and it helps reduce the overall business tax burden that you face. As with any tax analysis, always speak with your tax advisor.
Last but not least, remember that depreciation is tax deductible. No set of tax strategies for real estate investors would be complete without pointing this out, either. Lost value on the property usually can’t be claimed as a tax write off until it is sold. When you make improvements on the property, though, it’s often possible to depreciate them, in which case you can deduct depreciation of their value from your taxes. This is a vital strategy for many real estate investors.
Tax planning for real estate investors can be a difficult task, but with the right strategies, it is easy to gain control over your tax burden.
Learn all about the tax implications of real estate crowdfunding in our free eBook before you start investing.