You most likely went into the real estate investing business to not only create the lifestyle you have dreamed of, but to also build lasting wealth for you and your family. To accomplish this, knowing the ins and outs of property investing is essential, but creating wealth also entails being wise when it comes to your tax strategy. You will want to ensure that you are fully aware of the best tax benefits of real estate investing that are capable of decreasing your tax liability and keeping more money in your pockets come tax time.
The Many Tax Benefits of Real Estate Investing
Real estate investors can take advantage of significant tax benefits if they are on the ball as to what these tax breaks are and how they can capitalize on them. Most people feel that the IRS wants to take as much money from them as possible. Most real estate investors know this can be far from the truth. Investors enjoy many tax favors such as big property tax deductions, deferred taxes, and so on. Unless you are an expert, the tax code can be a bit confusing. So, we are sharing three of the top real estate investing tax benefits that will help you expand your portfolio and build wealth. Let's dive in and start saving money on our real estate taxes!
1. First-Year Bonus Depreciation on Rental Properties
As part of their money saving tax strategy, real estate investors can deduct 100% of the purchase price on any qualified property in the year the purchase was made and put into service after September 27, 2017. The building itself may not be bonus depreciation eligible though. This is because its depreciation timeframe typically spans over the qualifying 20 years or less requirement. A cost segregation study should be conducted to determine what portions of the building's cost is designated with having shorter depreciation time frames, and therefore be eligible for a bonus depreciation.
The cost segregation study may find bonus depreciation eligible items such as landscaping, outdoor lighting, fences, as well as the contents within the building. The building contents might include furniture, fixtures, heating and air systems, alarms, carpets, ceiling fans, and so on. Find out the most efficient way to do a cost segregation in our interview with Tom Wheelwright.
Before the new tax code, some of these items depreciated the same rate as the building itself. Now, because of the new Tax Cuts and Jobs Act, bonus depreciation makes it possible for real estate investors to depreciate the cost of these items 100 percent the same year of purchase. You can see why bonus depreciation is on the list as one of the best tax benefits for real estate investors.
It may be wise to hire an expert to assist in the cost segregation process. Cutting corners could take thousands of dollars out of your pocket. We utilize Tom Wheelwright of WealthAbility for our personal taxes. He's a tax genius and also the personal tax advisor to Robert Kiyosaki. You may also want to read his eye-opening book Tax-Free Wealth. It will show you how to legally pay less taxes on your rental properties.
2. A 1031 Exchange is a Powerful Real Estate Tax Benefit for Investors
A 1031 exchange is definitely a tax benefit every real estate investor should know about. This real estate tax advantage can create a situation where an investor may postpone paying taxes. This allows them to save thousands or even millions of dollars. Here's how it works. If an investor sells their rental property, they will most likely owe a considerable amount of money in capital gains taxes. In a lot of cases, it's enough to break the bank. However, if the investor simply purchases another like-kind piece of real estate, they can avoid paying those capital gains taxes on the sold property. This is also a great opportunity to trade-in underperforming rental properties.
There are some requirements to move forward with a 1031 exchange:
The two properties must be for business and investment purposes only to defer taxes, and not for personal use.
Must be a "like-kind" transaction - old property and new must be of similar nature.
Purchase price of the new property should be the same or a greater value.
Investors are required to identify the property that will be purchased within 45 days, as well as close the deal by 180 days.
To learn even more about 1031 exchanges, check out our post cast titled 5 Powerful Benefits of a 1031 Exchange.
3. Real Estate Investors Can Utilize a 20% Pass-Through Income Tax Deduction
Another money saving tax advantage that real estate investors can benefit from is a pass-through tax deduction. Investors who qualify can now take a 20% deduction on pass-through income. Having your company set up as a pass-through entity is one of the requirements. This includes having your business entity recognized as an LLC, S Corp, Sole Proprietorship, or a Partnership. There is also an income limit in place. You must earn less than $157,500 and $315,000 if you file as a married couple.
This is an incredible real estate tax deduction that can put thousands of dollars in your hands. If your business is not a pass-through entity, you can easily get the ball rolling to change that. We recommend contacting Garrett Sutton. He specializes in setting up the proper legal entities for real estate investors. If you mention Morris Invest, he will provide you with a $100 discount when utilizing his services.
Decrease Your Tax Liability as a Property Investor!
As you can see, there are more than a few real estate tax breaks you can take advantage when investing for long-term wealth. Furthermore, you may have already picked up on the fact that as a property investor, you're on the IRS's favorite's list as far as taxes are concerned. Therefore, it would be in your best interest to apply the 3 real estate tax benefits mentioned - bonus depreciation, 1031 exchange, and pass-through deductions, when applicable, as well as consult with an experienced tax advisor to determine what other real estate tax tax breaks you may be eligible for.
Having a smart real estate tax strategy in place will allow you to hold on to your money to grow your portfolio and create more wealth for you and your family!