It’s no secret, taxes can get confusing. There are seemingly endless regulations from the IRS on what you can and can’t do as a real estate investor as it relates to your taxes.
The long and short: taxes are complex, articles online are full of convoluted language, and people like you are missing out on putting more dollars back into your pockets.
That’s why we wanted to go over some important tax tips for real estate investors in an easy-to-read, jargon-free article. We’re not CPAs, however, and we do recommend consulting with one before filing your taxes.
Let’s get to it.
Have you ever seen someone folding up a receipt and shoving it in their wallet after eating a meal at a restaurant? Chances are they were saving that receipt to “write off” the meal. If you’re doing anything for the benefit of your business, there’s a chance you may be able to recover the tax you pay.
For example, if you bought $1,000 worth of drywall for a place you own, and you were charged a 6% sales tax ($60), you would be able to deduct that from the taxes you will owe at the end of the year.
Tax deductions like this aren’t only reserved for construction projects—almost anything business related can be written off.
Below are the most commonly overlooked expenses you can write off as a business owner:
Let’s look at a simple example of this. If you own an investment property that is worth $100,000, you would divide $100,000 by 27.5. (Tip: The depreciable basis is what you paid for the property only and not the land. Your CPA can explain this further).
Then let’s say this property creates $10,000 a year in rental income for you. Instead of paying taxes on the full $10,000, you would subtract the depreciation to give you the taxable number.
Though fix-and-flips can be lucrative, they are also subject to a hefty tax rate. Properties bought and sold in under 365 days are subject to a short-term capital gains tax. This means the money you make will be added to your income, and you will be taxed in whatever bracket you fit into.
On the other hand, long-term capital gains, including properties owned for longer than a year, are taxed at 0%, 15% or 20% depending on your tax bracket.
Single Taxable Income Brackets |
||
Ordinary Income |
Long-Term Capital Gains & Qualified Dividends |
Taxable Income Between |
10% |
0% |
$0 to $9,825 |
12% |
0% up to $40,000 |
$9,876 to $40,125 |
22% |
15% between $40,001 and $441,450 |
$40,126 to $85,525 |
24% |
15% |
$85,526 to $163,300 |
32% |
15% |
$163,301 to $207,350 |
35% |
20% over $441,450 |
$207,351 to $518,400 |
37% |
20% |
$518,401 or more |
Via irs.gov
This is important because waiting a little longer to sell your property could significantly impact how much you’ll be taxed on your income.
Let’s imagine two scenarios. In the first, you make $80,000 in a year, with $30,000 of that income coming from short-term investments. In the second, you make $80,000, with $30,000 coming from long-term investments.
By waiting at least a year, you’d take home an additional $7,500.
Also known as a “like-kind” exchange, a 1031 exchange is a great tool for you as an investor. This allows you to defer (pay at a later date) taxes on the income from a property you sell if you take that money and put it towards purchasing another property.
If you’re primarily investing in single-family rental properties, the 1031 exchange gives you a lot of flexibility to buy/sell assets without having to worry about being taxed at every sale—helping you build a bigger portfolio while deferring taxes along the way.
There are some pros and cons of the 1031 exchange, so be sure to do your research and team up with the right partners who can set you up for success.
If you’re thinking about refinancing, don’t worry about being taxed on the transaction. You can technically pull equity out of a home you currently own with a cash-out refinance and not get hit with a big tax bill. This is because no sale is taking place and you aren’t making money, so the IRS does not consider it taxable income.
Refinancing is a popular tip for real estate investors who want to take some cash and reinvest that equity into another property. And as stated above in the deductions section, the interest from this new loan will be a tax write-off.
In 2021 it’s time to say goodbye to the shoebox full of receipts. Tools like Stessa are helping landlords keep track of all their expenses and income to track the performance of their properties.
It’s always best to record expenses as you pay for them—trying to do them in bulk at the end of the year is not only daunting, it increases the chances that you’ll miss a possible write-off.
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The above is for informational purposes only and is not intended to be investment or real estate advice. You should always consult with your professional financial advisor prior to filing your taxes.