This is America. You can give your money to almost anyone you want. If you made a list of all the people you would give your money to in order, where would the tax man fall? If he is not at the top of the list, and I suspect he’s not, then you owe it yourself to take the time to learn these important tax strategies.
I’ve said it before, but it bears repeating: These are not ways to evade taxes or to use loopholes. These are incentives from the government to do the things it wants you to do. And one of the best incentives is money. So, do what the government wants you to do, stimulate the economy, and save on taxes.
.What follows are my favorite ways to save on taxes while making money in real estate.
My Favorite Tax Benefits of Real Estate
- Depreciation. Depreciation as an expense began in the US in the 1800s, related to rail road equipment deterioration. So, it’s been around for a while. In 1909 with a Supreme Court case, taking depreciation became a duty, not just a right. Today, you are required to account for depreciation when reporting your taxes. It’s a tax benefit you must claim, so do it! Depreciation expense is taken over 39 years in the commercial world. Every year, your commercial property depreciates 1/39th of it’s original value. That depreciation offsets the property’s income and many real estate investments take a loss on paper every year largely due to expenses, including depreciation. I set up my mortgages to take this loss. I don’t need the cash flow and the taxes that come with it.
- The 1031 Exchange. So much more has been written about this. The 1031 is a way to defer taxes when you buy a new property. Reaching the end of your depreciation in #1 above? Sell it, buy a new property, and reset the depreciation clock! Better yet, do a 1031 exchange. With this strategy, you take the capital gains tax you would have been responsible for and defer it to the new property. Sure, it’s kicking the can down the road, but when you pass the property along to your heirs, the tax burden is wiped out.
- Real Estate Professional. If you get more than 1/2 your income on real estate work, and you spend at least 750 hours per year on it, you might be able to claim this status. It’s probably easier than you think. This converts your real estate losses into active losses, rather than passive. Why is this important? Normally, real estate investing is considered passive. Passive losses can only offset passive income, so you can’t deduct it from your W2 job income. As a RE professional, you can. That’s huge.
- Property tax and Mortgage Interest. These are also deductions you can take on your tax return for real estate.
- Self-directed IRA. This is a way to take your retirement money and invest in real estate, pre-tax. Instead of giving a bunch of money to a rich stock broker, keep it yourself, and invest in real estate.
Of course, there are more, but these are my favorites. If you are not taking advantage of these, you really should rethink it and get started. Ask your accountant first.
