7 Tax Tips That Save Real Estate Investors Thousands of Dollars

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Tax Tips for Real Estate Investors

For years, real estate has been one of the most popular investment options—and for good reason. Rental properties, specifically, have the potential to not only generate significant income but also provide all kinds of tax benefits.

Whether you’re a current real estate investor or you plan to invest in the future, here are the top seven tax tips to keep in mind!

1. Maximize the Depreciation Deduction

Depreciation is calculated by considering the “useful life” of an asset, and depreciation deductions allow you to deduct the cost of your investments.

While land can never depreciate, the assets on it certainly can. Commercial properties depreciate over a span of 39 years, while residential properties depreciate over 27 ½ years.

A cost segregation report is highly recommended for commercial property investors to separate which parts of their assets depreciate faster, allowing for a more significant deduction. Depreciation of things like countertops, appliances, and cabinets can be calculated to maximize your return every year!

2. Allocate Repairs Separately from Improvements

Repairs and improvements should be documented separately in your records. Improvements to your property increase its value, while repairs help to maintain good standing.

Since repairs do not add to the property’s actual value, they are considered deductible items. Painting, repairing broken windows, and repairing deteriorated plumbing are all considered repairs eligible for deduction. If you are a landlord on a smaller scale, take advantage of the Safe Harbor for Small Taxpayers. Qualifying for this safe harbor allows you to claim repairs that may prove trickier under the standard IRS rules.

3. Take Advantage of Tax Credits

There is a bevy of tax credits to explore as a real estate owner. The Disabled Access Credit and the Rehabilitation Tax Credit are two very popular credits used to increase tax deductions while improving the property.

The Disabled Access Credit is for those who incur expenses to provide access to persons with disabilities. These expenses might include adding a ramp, converting a bath to a roll-in shower, or adding a grab bar and bench to an existing shower.

The Rehabilitation Tax Credit, on the other hand, incentivizes the restoration and preservation of historic buildings.

4. Hire Your Spouse or Child

You can employ your spouse or child to manage your commercial property, and a certain portion of those wages will be tax-free. You can even employ your child under the age of eighteen, and you won’t pay social security or Medicare tax on those wages.

This tip is a bit tricky, and as with all of these tips, you should consult your tax preparer on the advantages or disadvantages this could have for you and your family.

5. Check Out Using Your IRA to Invest

Your retirement plan, such as your IRA or Roth IRA, can be used to invest in real estate or real estate expenses—such as a mortgage or tax liens.

The most important part of this strategy is to find a trustee who offers true self-directed IRAs. Self-directed IRAs allow you to make investments, such as into your property or properties. The IRA would pay the property expenses while the accrued rent or profits from the property go back into the IRA.

6. Take Advantage of Home Sales Gain

This is another great strategy, which could allow you and your spouse to claim up to $500,000 on a home sale gain.

To claim this benefit, you must have lived in the property for two of the past five years. So, even if you lived in the property for ten years and then rented for six years, you would be unable to benefit.

People who are interested in “flipping” properties should take serious note of this tip. You could live in a home for three years, for example, fix it up for a profit, sell it tax-exempt on the capital gain, and then invest in a rental property—or perhaps repeat the process!

7. Perform a 1031 Exchange

A 1031 Exchange is also known as a “Like-Kind Exchange.” First and foremost, you will need a real estate attorney familiar with this process. If a property is worth more than you bought it for, you will pay a heavy tax on that gain when you sell it.  In short, you will be rolling all proceeds from selling to a new “like-kind” property.

During this procedure, you have 45 days from the sale of your current property to identify a new property for exchange. From then, you have six months to close on this new property. This regulation allows for almost unlimited tax deferral on the gains of the sold property!