Real estate can be a lucrative long-term investment for your portfolio. It can also provide you with tax breaks and deductions along the way.

But real estate tax law can be tricky, particularly for first-time investors. It’s important to do your research and understand all of the codes and breaks you can take before you purchase your first property.

Here are six ways you can take advantage of tax codes as you delve into real estate investment.

 

1. Lower Taxable Income With Operating Expenses

If you are a new landlord or are in the market to become one, remember that income from rental properties is taxable. But you can reduce how much you’ll have to pay in taxes by reporting and deducting relevant operating expenses.

Operating expenses can cover a lot of territory. Day-to-day expenses could include advertising costs, screening prospective tenants, pest control, yard maintenance, or routine maintenance, such as new HVAC filters. You can also deduct more major expenses, such as mortgage interest, property manager salaries, and landlord-paid utilities.

For example, if you earned $10,000 in rental income but you spent $4,000 in operating expenses, your taxable income will be $6,000.

 

2. Deduct Income Property Purchases as Business Expenses

While operating expenses may sound like obvious deductions, you can actually receive tax breaks for purchasing an income property in the first place.

U.S. tax codes allow business owners to deduct the cost of assets needed to operate their businesses, such as website domains, software, and equipment. Real estate purchased to become a rental property can be deducted from your taxes over the years. This is known as reporting depreciation, or a portion of the asset’s total purchase value.

Reporting depreciation is a great advantage for new investors, but it can be complex. If you’re struggling to navigate your options, it might be time to connect with a local realtor to learn more about specific tax codes and breaks and how they can benefit you as a new or prospective landlord.

3. Write Off House-flipping Expenses and Losses

Come tax time, home flippers (people who buy homes, fix them up, and sell them( can save money by reporting expenses and losses.

As with rental property owners, you can report and deduct expenses paid in the process of renovating your property. That includes salaries and fees to contractors and laborers as well as the cost of supplies. You can also deduct any interest you might pay on the mortgage between the time you buy the house and when you sell it.

If you’re looking to get into the business of flipping homes, research how you can make the most profit. Learn about your local real estate market, and find out where buyers are shopping for properties — it may be online.

 

4. Buy Into Projects That Take Advantage of Breaks

Flipping homes or becoming a landlord may be more of an investment of time, experience, and money than you can spare at the moment. You can still build your real estate portfolio by buying shares of a development project or property with other investors.

Before buying into any real estate investment opportunities — like real estate investment trusts (REITs), real estate limited partnerships (RELPs), or crowdfunding — talk to your project manager. Ask which tax breaks they plan to take advantage of and how those savings can be passed on to you as an investor.

For example, investing in low-income housing yields significant federal tax breaks. However. the amount credited varies, depending on factors such as whether it’s a new build or a renovation. In addition, REITs and RELPs have different term conditions than crowdfunding, and the payouts work differently as well.

 

5. Take Advantage of the 1031 Exchange

While the 1031 exchange isn’t a deduction, it does help real estate investors build their investment portfolio’s value over time. IRS Code 1031 enables you to defer tax payment on income earned from the sale of an investment property if you reinvest the earnings in a like-kind property within six months.

That means if you sell a $150,000 house purchased for $100,000, you can defer paying taxes on that $50,000 difference in capital gains if you roll it over into the purchase of another property — for example, one you purchase for $175,000.

So if you’ve just flipped a home and you buy another property, you won’t have to pay taxes on the earnings. Like-kind also offers flexibility, allowing you to invest the income from the sale of a flipped home into the purchase of a new parcel of land for development or a rental property.

 

6. Report Your Losses

Not all real estate investments pay off in the way we hope. Fortunately, come tax time, you can offset some of your losses.

For example, if the market drops and your investment property’s value depreciates between the purchase and sale, you can report the loss in income. Likewise, you can report losses in any shares you might have in a REIT, RELP, or crowdfunded project.

Categories | Article | Fundamentals
Tags |
  • Contributor

    We believe in the positive, life-changing impact of real estate investing. Our mission is to help investors achieve their goals to build wealth, better manage time, and live a life full of purpose.

Related Posts

0 Comments

Submit a Comment