Successful real estate investors know making money on deals isn’t enough. Saving money on taxes is key to building and leveraging wealth.
There are a slew of tax-saving strategies you can use all through the year. But even up until December 31st you can take advantages of numerous year-end tax deductions and savings—which dramatically increase your bottom line and poise you for long term successful investing.
If your year has been profitable enough to place you in a high tax bracket, then your goal at year-end should be to increase real estate tax deductions while putting off more income until the coming year (January 1st). On the other hand, if your year has been less than stellar, placing you in a low tax bracket, then you want to do the reverse—put off tax deductions until the following year while increasing your income for the present year.
Assuming you are currently in a higher tax bracket, these tax tips are best implemented as year end strategies through December 31st. Whenever you take a real estate deduction or expense, always keep full documentation, ideally with a separate checking account for each property.
Accelerated Depreciation—Deductions even Your CPA Overlooks
The IRS allows annual deductions—depreciation—for wear and tear on income property. Typical tax forms provide for standard depreciation of a building spread out over 27.5 years for residential and 39 years for commercial. But real estate investors benefit far more by claiming accelerated depreciation or depreciation deductions over a shorter period of time.
Profitable real estate investors love IRS REG 1.48-1, (which many CPAs fail to implement costing less informed investors precious dollars). Tax regulation 1.48-1 reduces your tax liability like no other vehicle, by allowing for accelerated depreciation on moveable components of a property—spread over just 5 years for personal property (for items such as cabinets, carpeting and fixtures); and just 15 years for land improvements (for items like landscaping, pavements and fences).
Component depreciation—now called cost segregation—includes a very long list of items you can claim in your early years of building ownership, all of which add up to many thousands more in tax savings than with the longer term straight-line depreciations.
You can even take full depreciation all in one year for components you replace, like electrical or plumbing—while you increase the value of the property in the process!
Settle on Rental Property by Year End
Even if you settle on a rental property as late as December 31st, you can still take the full year of component depreciation, as well as deductions on interest and other fees.
Deduct Preventive Maintenance
Instead of categorizing home repairs as capital improvements, claim them as deductible repairs, using a method similar to component depreciation. Break down each repair into an itemized list or you will get audited. Save all backup receipts.
A plus with deducting repairs is that the work does not have to be finished until you file the return.
Pay for Real Estate Marketing Efforts Now
Now is the time to schedule work on your website or invest in accounting software and other investment tools. Pay with a credit card or schedule payments now and you still qualify for year end tax deductions.
Schedule Real Estate Education and Events Now
Sign up for programs that support your investment success. Real estate coaching, continuing education courses and membership in investor associations can all be deducted. As long as you sign up by December 31st, you can take the deduction in the current year even if you don’t pay until after the new year.
Postpone Income Until After January 1st
If you have income in the pipeline, such as fees, commissions or bonuses, postpone payments until after January 1st to help further reduce this year’s taxable income.
Re-Invest Your Year End Tax Savings
Use your year end tax savings to re-invest in other properties, upgrade income properties or invest in a self-directed IRA. Even a few thousand dollars in year end tax savings can mean the difference in your ability to flourish in the coming year and many years to come.
QUICK TIPS
- Saving money on taxes is key to building and leveraging wealth.
- Implement year end tax tips up until the day of December 31st.
- If you are in a lower tax bracket, then you will want to use year end tax strategies to postpone deductions into the next year and increase your income.
- If you are in a higher tax bracket, then you want to use year end tax strategies to increase deductions now and delay income until after December 31st.
- Always keep full documentation, from receipts to written notes, for every real estate deduction.
- Look for a knowledgeable CPA who understands the nuances of real estate investing and regulations for accelerated depreciation.
- Cost segregation saves you thousands more than traditional depreciation methods, since it allows you to deduct individual items in your property over a shorter time, rather than just the overall building over a longer period of time.
- All ongoing education and marketing are a real estate tax deduction for your business.
- Understanding tax savings in real estate investments builds wealth.
