Tax Basics for Real Estate Investors
Real estate investors have a unique income stream. At the same time, it comes with its own distinct challenges in terms of tax liabilities. Therefore, it is important to consult with a tax professional, such as AccuraTax LLC, located in Fort Collins, CO, about your potential liabilities and tax deductions. Below are just a few of the important things to keep in mind during tax season.
For many real estate investors, it is critical to keep track of all your expenses related to the management of your properties. This includes mortgage interest to the paper for the printer in your real estate management office. While this might not always seem as a benefit, it can be if your real estate business shares space with your personal life. For example, if you have a home office, then you might be able to deduct a share of the expenses related to that office in terms of lights, home repairs, mortgage interest and more. Of course, this is limited by the amount of space your home office actually takes up in your home.
By itemizing carefully, you can take advantage of the business use aspects to save on your tax liability. This includes travel expenses, mileage and other costs. However, you will want to confer with your accountant about what will actually be able to be deducted based on your personal business.
When you decide it is time to sell one of your real estate holdings, you are typically going to have a gain of some kind, which will result in a tax liability. However, it can be taxed in one of two ways, as described below:
Short Term Capital Gains – These types of gains are made with a property or asset that was held for less than a year. This income will be taxed at whatever your regular tax bracket is, based on your income. However, most investors will be holding their properties for longer than a year, so it will be rare that they will have to pay this particular tax.
Long Term Capital Gains – Since most real estate investors are holding their properties for more than a year, they will typically fall into the long term capital gains bracket. The tax percentage can range from 0% through 20%, depending on your income tax bracket. A majority of individuals will end up paying approximately 15%.
This particular deduction is based on the idea that materials eventually break down and need to be replaced. Yet, most things do not break down in one year, but over time. Thus, you get to deduct the cost of the item over time on your taxes. For a real estate building, not the land itself, the IRS will allow you to deduct the cost over time. This is often referred to as a “phantom deduction” because the property values fluctuate and most of what needs to be replaced over time is deductible in its own right.
Even though you might only be able to take the deduction for the IRS life of the property, it still provides a way to reduce your taxable income during those years. Additionally, the IRS can recapture that depreciation when you sell, often with a tax rate of 25% on the money or gains from your sale. Discuss with your tax professional, such as AccuraTax LLC, your options if you have sold one of your rental properties during this past year.
There is an option to allow a real estate investor to sell a property and carry their basis forward into the purchase of a new property, which is called a 1031 Exchange. It essentially kicks the paying capital gains taxes down the road until the new property is sold. However, to use this type of exchange, the IRS has created some strict rules that must be followed, as described below:
Finally, it is important to note that real estate investing has very unique tax implications, so you will want to consult with your accountant or tax professional to determine the best options to satisfy your tax liabilities.
Call or click on the link below to connect with a professional at AccuraTax LLC in Fort Collins, CO, about your real estate investments and the tax implications of them.
