Important Tax Strategies for Investors to Save Money
For owners of investment properties, several crucial tax strategies might help reduce taxes.
Tax planning techniques can help you postpone making payments or lower the total amount you owe. But, you must keep in mind that there are distinct rules for various techniques. Here are some tax planning ideas for owners of rental properties.
Tax Planning Techniques for Property Investors
As a landlord or real estate investor, you have access to a variety of tax strategies. These techniques will assist you in postponing or reducing any taxes you might owe.
1. Benefit from Depreciation
Utilizing depreciation is the first tax solution for owners of investment properties. Depreciation enables landlords and real estate investors to spread out the cost of properties, therefore allowing them to match revenue during the same period with depreciation expenditures.
For owners of investment property who want to make their assets depreciable, the IRS has four requirements:
- The asset has a predetermined useful life, which means it ages, degrades, is consumed, loses value over time due to natural occurrences, or simply wears out.
- The home is yours.
- You utilize the property for either your business or an activity that generates cash.
After putting the property into use or when it can be used as a rental, landlords and real estate investors can start deducting depreciation.
However, for landlords and real estate investors, there are several techniques to stop depreciation. The useful life of a residential rental property is restricted by the IRS to 27.5 years.
If you choose to depreciate your assets, you may do so up until one of two milestones is reached: 1) If the entire cost or basis of the asset is deducted; or 2) If the asset is retired from service.
The four steps of calculating depreciation are as follows:
- Establish the foundation of your property.
- Separate the costs of the land and the buildings.
- Establish your foundation in the house.
- Identify the adjusted basis if it is required.
2. Increase and Leverage Deductions
Tax deductions are a different tax method you might use. You can use deductions to lower your income tax on the profits from your property.
Furthermore, depending on your involvement in rental property, you may be eligible for deductions as a real estate investor. Real estate participation is divided into three groups by the IRS:
- Material involvement
- Active involvement
- Passive pursuit
You are eligible for several deductions for your investment property and work related to maintaining it. For example, several frequent deductions for an investment property include:
- Office costs at home
- Professional services for offices
- Tax on real estate
3. Postpone taxes by using a 1031 Exchange
A 1031 exchange is the third technique to apply tax strategies for owners of investment property.
With this in mind, you can exchange one investment property for another through a 1031 exchange, but the two must be of the same type.
Furthermore, with this exchange, you can alter your investment without taking a profit or realizing a capital gain.
For a 1031 exchange, there are several guidelines for your property purchase and sale. Three timetable regulations may affect your ability to participate in a 1031 exchange:
The proceeds from the sale of your property must go to your intermediary. After you sell your property, the middleman will keep your proceeds and utilize them to purchase your new home. But, receiving money makes it impossible to be eligible for a 1031 exchange.
There is a requirement for a property within 45 days of your property sale. Your intermediary will receive a written designation from you specifying the replacement property, along with the property you wish to purchase.
Important to know – You must close on the new property within 180 days of selling the previous one.
4. Increase the Tax Basis of Your Property
Increasing the tax basis of a property is the third tax approach that investment property owners might use. Remember, when you buy a home with cash or another asset, the purchase price is your cost basis. The cost basis may also take into account extra expenses like:
- Excise duties
- Putting in place and testing
- Property taxes
- Fees for recording
You will use goods contributed to a capital account to enhance the property basis to increase the tax basis of your property.
Rehabilitation costs are a second expense that will raise the tax basis of your property. So, these costs will accumulate as you undertake property renovations, but there are two actions you can take to keep track of them and find potential tax benefits.
For these costs, meanwhile, you will first deduct rehabilitation credits before adding them to your basis. Next, if you need to recover any credit, you will raise your basis by that sum.
Other costs that raise the tax basis of your property include:
- Extending utility service lines to your home will cost money.
- Planning fees
Using a CPA to Lower Your Investment Property Tax Burden
Having this in mind, numerous responsibilities come with owning investment properties. Therefore, maintaining deadlines, procedures, and rules while working on your properties can become difficult; So, if it does, think about seeing a CPA.
Work with accountants and auditors who can assist you if you wish to lower the tax obligations. And get tax strategies associated with your investment property. Work with a CPA at Your Part Time Accountant to acquire tax advice as you are an investor in real estate.