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Investors turn to real estate to diversify their portfolios and earn capital gains. This is because real estate can be an excellent tangible investment that turns into high capital gains. The expenses of owning real estate, though, can offset those profits.
However, taxes can significantly reduce your profits on your investment properties. So here are some key ways to keep your taxes to a minimum.
Keep a Careful Paper Trail
You’ll need a paper trail for every transaction that has to do with your investment property. For example, when you buy, refinance, and sell the property, you’ll have paperwork that shows the expenses you paid that you might be able to write off on your taxes.
You’ll also need a copy of your property tax bill and mortgage interest paid, as you may be able to write the expenses off and decrease your total taxes owed.
Make it a Long-Term Investment
Long-term capital gains are much lower than short-term capital gains. The IRS considers an investment short-term if you owned it for less than one year. That’s why holding onto your investment properties for at least one year or longer will help lower your tax liability.
This is most important when flipping houses. If you buy and flip within a year, you’ll get hit harder on your taxes than you would if you held the property for a year and then sold it.
While these tips will help you minimize your taxes, it’s always best to consult a licensed tax advisor to ensure you’re making the most out of your investments. Why pay more taxes than necessary when you could have the money in your pocket as capital gains with the proper deductions?