While it is impossible to avoid taxes completely, it is possible to rely on several strategies to soothe the effect of the tax burden on one’s income. In this article, you will discover how to reduce taxes as a real estate investor.
How to Reduce Taxes as a Real Estate Investor – Feasible Strategies Only
Holding Title of Property for At Least One Year
Several real estate investors operate “flipping” houses, which is purchasing distressed properties, fixing them up, and re-selling them for a profit. However, real estate investors who decide to flip real estate too early may be subject to additional taxes.
When an investor holds the title of a property for less than a year and resells it for profit, the amount obtained as profit is subject to the standard income tax rate. Accordingly, flipping one or more properties per year may classify an investor as a “self-employed dealer” for tax purposes.
In such cases, the Internal Revenue Service (IRS) may subject the investor’s earnings to the FICA (Federal Insurance Contributions Act) tax, which includes percentual “contributions” to Social Security and Medicare.
If a real estate investor wants to flip houses but holds the title of these properties for at least one year, it automatically curbs the risk of the “self-employed dealer” classification. Once the property is flipped, the income generated will incur capital gains (not standard income tax).
Considering the tax percentage of capital gains for most Americans is 15%, it is much better than the standard income tax rates.
Multiple Write-Offs and Deductions
Investing in real estate automatically creates several expenses and costs that would not exist otherwise, but the possibility to seize advantage of write-offs and deductions is always at hand for smart investors.
The list of claimable deductions is extensive, ranging from costs with property mortgage to attorney’s fees. As long as you can keep detailed track of all the business-related expenses, it is possible to deduct a significant percentage of the amount owed to the IRS, including:
- Interest on mortgage payments
- Depreciation
- Insurance premiums
- Property tax
- Costs with repairs and maintenance
- Administrative fees (e.g., property management fees, lender fees, title company fees, etc.)
- Closing costs
- Home office expenses
- Business-related travel and mileage costs
- Advertising costs
- Real estate support expenses (e.g., tools, machinery, etc.)
- Fees paid to professional assistants (e.g., brokers, accountants, etc.)
Please note that some items do not require the taxpayer to itemize them when filing tax returns, which simplifies the process significantly. In such cases, the IRS will simply decrease the percentage of taxable income on Schedule E or C.
If you need assistance handling the appropriate tax forms, consult with an experienced accountant as soon as possible.
Living in the Property for At Least Two Years
While this alternative might not be practical in many cases, it is a valuable solution for real estate investors. Also referred to as “live-in flip,” the method is simple – an investor buys a distressed property, moves in, and works on upgrading the property during the stay.
After at least two years, the first $250,000 of capital gains is not subject to taxes for single investors. Married investors who moved in with their spouses can enjoy a $500,000 threshold – all tax-free.
How to Reduce Taxes as a Real Estate Investor – Immediately Contact an Expert CPA
Waste no time with uncertainty. Contact Edward D. Quilca, CPA by calling (786) 310-5582 or emailing [email protected] to find the tax-saving strategy for your case.
