8 Real Estate Investor Tax Strategies to Lower Your Cost

  • May 16, 2024
  • 5 min read
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These days, passive income is one of the most talked-about topics due to the rising cost of living; while discussing it, you’ll likely hear about real estate investing.

A real estate business can certainly produce excellent passive income. However, it requires some initial hard work to experience significant cash flow.

One aspect of building a profitable real estate business is implementing real estate investor tax strategies. By becoming aware of your tax implications as a real estate investor and learning how to reduce these costs, you can maximize your gains and increase your bottom line.

Check out these eight strategies that will boost your earnings!


1. Maximize Travel Expense Write-Offs

One of the simplest real estate tax strategies to implement is write-offs. Write-offs allow you to reduce your taxable income.

Traveling to and from your rental properties is a business expense. Travel expenses can include:

  • Flights
  • Food
  • Hotels

You can often also write off professional development and education opportunities related to real estate investing.


2. Deduct for Depreciation

Real estate doesn’t always appreciate. If your property depreciates, you can deduct the loss on your tax returns.

Additionally, the IRS gives residential buildings a lifespan of 27.5 years, meaning you can deduct 1/27.5 of the property’s value for the first 27.5 years of ownership. To deduct property depreciation at a faster rate, property owners can use a cost segregation study.

However, if you sell the property for a profit, you’ll owe taxes for depreciation recapture, the profits you didn’t pay taxes on through the depreciation deduction.

The IRS also allows you to depreciate capital improvements. For instance, if you make significant repairs to the home’s foundation, you can depreciate the cost for 27.5 years.


3. Take Advantage of Deductions

When considering how rental income is taxed, it’s essential to understand that the IRS taxes rental income like any other form of income. That’s why you want to use rental income deductions to reduce your taxable income.

Some tax deductions include:

  • Accounting fees
  • Closing costs
  • Legal fees
  • Maintenance costs
  • Marketing and advertising expenses
  • Mortgage interest
  • Property insurance
  • Property taxes
  • Property management costs

Further, the Tax Cuts and Jobs Act of 2017 provides a tax advantage for small businesses, including real estate investors. Under this tax law, small business owners can deduct an additional 20% of their net business income (with stipulations). The IRS calls this the pass-through deduction.


4. Leverage Tax Incentives

While owning a rental property has many tax benefits, there are also some tax incentives.

Two such examples include:

  • 1031 Exchange: defer capital gains tax by reinvesting the profits on a similar property
  • Qualified Opportunity Zone Funds: defer capital gains tax by investing the profits into a qualified opportunity zone fund

In addition to tax incentives, implement tax planning strategies to ensure you don’t overpay your tax liability. Under the current tax code, the IRS considers real estate investors dealers, not investors. This means you’re self-employed and owe double employment taxes (FICA taxes), which fund Social Security and Medicare. The tax rate is 15.3%.

Yet, there are several ways to prove you’re not a dealer to avoid this tax. For instance, you can create a partnership LLC or S-corp for your business.

When in doubt, work with a skilled tax professional to handle your real estate finances and prepare your tax returns to prove you are an investor, not a dealer.


5. Borrow Against Your Equity

If you need funds for a new investment, use your equity instead of liquidating. A cash-out refinance gives you a new property mortgage in exchange for cash.

This option helps taxpayers avoid capital gains tax. While you’ll still have a mortgage payment with interest, you’ll likely pay less than if you had to pay capital gains tax.


6. Hold Properties for More Than a Year

This is one of the easiest tax strategies for real estate investors.

When you sell an asset, the IRS taxes you on the profit. If you own an asset for less than a year before you sell it, you must pay short-term capital gains. The short-term capital gains tax rate is the same as your ordinary income tax rate. Tax brackets range between 10% and 37%, depending on income level and filing status.

However, when you own an asset for more than a year before selling it, you’ll pay long-term capital gains tax. The tax rate is between 0% and 20%. Most Americans pay 15% for long-term capital gains, much lower than the average income bracket rate. The tax savings are clear.


7. Live in the Property for Two Years

If you live in a property for at least two years, the IRS will reduce your tax bill for the capital gains tax you owe when you sell the property. Singles get the first $250,000 of profits tax-free, while married couples get $500,000 in profits tax-free.

Thus, when buying a new property to flip, consider doing a live-in flip to take advantage of this tax benefit.


8. Own Properties in a Self-Directed IRA

Individual retirement accounts (IRAs and Roth IRAs) are tax-deferred accounts that allow individuals to invest for retirement. However, the less commonly known self-directed IRA enables you to invest in real estate tax-free.

Importantly, you must hire a custodian or trust company to administer this type of IRA. Once you have the IRA, you transfer money into it and create a legal entity to buy and own investment properties.

With this option, buying properties with cash is best instead of financing them. Financing is an option, but it comes with stipulations. For example, you will still have to pay taxes on the financed portion of the purchase price.


Take Advantage of Real Estate Investor Tax Strategies

Don’t wait until tax time to implement these real estate investor tax strategies. Work with a CPA and property manager to ensure all your property finances are to maximize your ROI.

Work with All County Property Management today. With a team of professionals at locations nationwide, we offer a wide range of property management services for real estate investors, so you don’t have to worry about getting your investments to work for you. 

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