How the new tax changes impact you as a real estate investor depends upon where your income falls. Short-term and long-term capital gains are taxed at different levels. This means you can sell your primary residence and pay less in capital gains than if you buy an investment home and flip it in a few months. Here are a few things to keep in mind as a real estate investor:
1. Track Maintenance Costs
Even though you'll pay taxes on capital gains when you sell an investment property, you can offset some of these costs by keeping track of maintenance and repair expenses. Another idea if you sell one property is to invest in another. Check with your CPA first, as the rules on this vary depending upon profit, the cost of another property and many other factors.
2. Renting Out a Home You Own
Some people choose to rent out their existing home and move to another location. With the tiny house movement in full swing, people choose to rent out their larger homes and move into a small one they can pay off in full. They may not realize that as soon as they rent out their home, their primary residence becomes an investment property. When it's time to sell that property, you'll have to pay capital gains. The interest paid on these investment profits will be higher than your primary mortgage rate, but any improvements are deductible.
3. Buy in an Opportunity Zone
There are specific low-income neighborhoods that qualify for a deferral of capital gains when held for up to 10 years. The IRS announces where the zones are located. If you haven't yet bought an investment property, purchasing a home in one of these zones, perhaps one that is in the process of being gentrified, allows you to defer capital gains and build wealth.
4. Plan Sales Strategically
If you own more than a single investment property, you can plan how you sell your short-term investments — long-term capital gains are taxed differently —so you don't hit the higher tax brackets. For example, a married couple filing jointly who makes under $77,200 is at a zero-percent capital gains rate, while a couple making under $479,000 pays 15 percent on capital gains.
5. Remember to Plan for State Taxes
On top of what you owe the federal government on capital gains, you'll also owe your state government taxes. Each state has different tax brackets, so research what yours charges and where the caps are to protect your investment as much as possible. One way to offset the taxes you'll pay is by selling off losing investments in the same year you sell winning investments.
For example, the market shifted and you can no longer get the rent needed to make a property profitable. You sell at a loss of $10,000. At the same time, you sell off a property you bought and flipped and profit by $15,000. Your net profit is now only $5,000 instead of $15,000.
Traditional Methods Still Work
Even though there are changes to capital gains rules under new tax laws, some tactics remain the same and still work. Hold your investments longer, use tax-advantaged accounts such as IRAs and 529s to defer gains, or carry losses over from one year to the next. With a little planning and strategy, you can pay your fair share of taxes while still minimizing the impact on your pocketbook.
Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.