Tax strategies for Real Estate Investors
Real estate investing offers people the ability to develop their net worth and passive income. However, the tax ramifications to appropriately minimize the tax liabilities and maximize profits associated with this venture can often be convoluted and complex. In this post, we’ll analyze a few tax strategies that will help real estate investors enhance their …
1031 Exchange (Like-Kind Exchange)
This strategy allows the investor to postpone capital gains tax on the sale of an investment property if the profits from the sale is used to buy a property of equal or greater value within a certain time limit.
To qualify for a 1031 exchange, the new property must meet the following requirements:
Be valued at an equal or greater value than the previous property
Identified by the investor within 45 days of sale of the previous property
Be acquired by the investor within 180 days of sale of the previous property
Be acquired by the same investor who sold the previous property
If the new property is exchanged with a related party, the investor must keep the property as an investment for a minimum of two years
2. Depreciation Deduction
The IRS allows investors to reduce their annual taxable income through depreciation of their residential and commercial properties. The IRS allows the investor to depreciate commercial buildings over a period of 39 years and residential buildings over a period of 27.5 years, resulting in large tax breaks. Contact our team to help perform a cost segregation study on your property to appropriately calculate the full cost basis in order to maximize your annual profits.
3. Interest Deduction
Interest paid on mortgages for investment properties as tax-deductible as a business expense.
4. Qualified Business Income Deduction (QBI Deduction)
The QBI deduction allows small business owners and self-employed individuals to deduct up to 20% of their annual business income on their taxes. For the 2024 tax year, the income limits for single filers are $191,950 and married filing jointly are $383,900. The deduction is phased out for income earned over this threshold.
5. Passive Activity Loss Rules
Investors are able to deduct losses from rental properties against other passive income earned. It’s important to keep accurate records of income and expenses for each property.
