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If you’re a real estate investor, you may be missing some important ways to lower your tax burden. They can help increase your profits and make real estate investing a profitable side hustle without losing your income to the IRS.
Here are the top ways to reduce your tax burden as a real estate investor.
Take Advantage of Long-Term Capital Gains
Long-term capital gains often have lower tax rates than short-term gains. Keeping your properties for at least one year entitles you to long-term capital gains and lowers your tax liabilities.
Live in the Property for Two Years
You can claim the primary residence tax exemption if you live in the property you rent out for two of the last five years before selling it. This means you can exclude the first $250,000 in capital gains if you’re single and $500,000 if you’re married, filing jointly.
Buy Properties with a Self-Directed IRA
This option is tricky and requires the help of a professional, but you can buy and invest in properties through your IRA. Where it gets tricky is if you need financing. It doesn’t work as well, but if you can pay cash, you may defer any tax liabilities.
Use the 1031 Exchange Option
A 1031 exchange allows you to temporarily avoid paying taxes on capital gains when you sell a property but immediately reinvest the funds in a ‘like-kind’ exchange, aka another property. You must invest in another property within 180 days of selling the property but identify a property within 45 days.
Take the Deductions
Real estate investors have access to a large number of deductions. However, don’t overlook the benefits of being a real estate investor, including mortgage interest, taxes, advertising, property management, travel, home office expenses, and closing costs, to name a few.
Write off Depreciation
The IRS allows investors to depreciate residential properties over 27.5 years, so you can deduct a small amount of the property’s value each year. However, when you sell the property, you’ll owe depreciation recapture on any profits made.
Take the 20% Pass-Through Deduction
You may be eligible to deduct up to 20% of your business income from rental real estate on your personal taxes. It’s called the 20% pass-through deduction and lowers your personal tax liabilities.
Keep Properties Until you Die
If you keep properties as a part of your estate and pass them down to your heirs, they can avoid taxation. Your heirs receive the property at its stepped-up or today’s value and only pay capital gains on any future profits, not those made from your original price.
Final Thoughts
Lowering your tax burden as a real estate investor isn’t as hard as it seems. There are many overlooked tax deductions real estate investors can use. If you invest in real estate or are interested in doing so, contact me today to learn how to save on your taxes.