Investments in the Real Estate Business has grown and became more popular significantly over the years getting a lot of people rich. It became enticing because of the good generation of earnings and gives taxpayers several tax advantages as well that Rental Properties does not provide. An investor should be glad to know about these available tax benefits as it helps them grow their wealth even more. Now, what investor should first figure out is how will they be able to take advantage of these benefits. To help you properly place the odds in your favor when it comes to taxes, here are the top five real estate investment tax tips we would like to share with you.
1. Hire an Experienced Certified Public Accountant
Since tax season is considered by estate investors like you to be a very important day of the year, it is expected that you become mindful of your tax liability or benefits. You should know by now that taxes are a great wealth building vehicle in real estate which means neglecting it, can also mean you’re throwing money away. With that in mind, it is therefore important to find the best and the most experienced professional to help you get everything done right during tax time. A Certified Public Accountant will offer a great advantage to an investor who deals with real estate, even better find an Accountant who is not only knowledgeable in his field of expertise but also an investor himself.
2. Proper Tracking Of Yearly Expenses
An accurate and proper tracking and recording of expenses throughout the year is another tip we think will be useful to you as a real estate investor. Tracking of expenses includes making sure the money you spend are all recorded, where it was spent, and then the purpose of spending it. The more diligent you are in keeping up with your expenses the better since they are necessary if you want to qualify for the tax deductions and tax breaks you may potentially get. You won’t be able to remember every single penny you spent which is why documentation and receipts must be kept accordingly. Remember, the IRS will need you to show proof of your claims so make sure you avoid all the hassle looking for proofs by saving them as early as now.
3. Organizing Documents Matters
One common mistake made not only by a real estate investor but for most taxpayers as well is being unorganized with their documents. You will waste a lot of time of effort if your receipts cannot be found or all over the place. It will expose you to potentially making mistakes on your tax return too. It is best to organize everything before all the receipts accumulate and you no longer be able to manage it. You can either use folders or digitize all your records; whatever method you use be sure to strictly follow it. In addition, the accountant you hired will also find it easier to prepare your tax return when tax season comes.
4. Aim For Long Term Property Ownership
If you bought a property and sold it before reaching 365 days, your gains from it will be subject to a short-term capital gains tax. This means whatever money you make from that sale, will be added as an income and will, therefore, have you taxed based on the certain bracket you fall into. Those property owned for the long term will have long-term capital gains. These properties are those owned for more than a year and will be taxed at 0%, 15%, or 20% depending on whatever tax bracket it fits. Therefore, that certain time you waited before you sold your property can significantly affect your taxable income and your liability overall.
5. Take Advantage Of The “Like-kind” Exchange
A “like-kind” exchange also known as a 1031 exchange serves as a great tool for investors like you because it will you to defer taxes on the earnings you made from your property once you sold it as long as you take that money and purchase another property. Those who invest in single-family rental properties, the 1031 exchange is a flexible way of avoiding or deferring tax giving you more chance to utilize your money for something else. It’s best to consult your Accountant upon looking 1031 exchange to determine the pros and cons of it.
