We know that investing in real estate is a proven method to build wealth, and thankfully our country’s tax laws are generally real estate friendly. The new federal tax law, which took effect with the current tax-filing season, provides real estate investors with some additional tax benefits that didn’t exist before, but it could also create confusion. Here at Patch of Land, we don’t provide tax advice; we aren’t tax experts. However, we thought it might be timely to pass along tips from real estate and tax experts but please note that passing along these tips doesn’t constitute an endorsement. Here are five tax strategies to consider this tax season:
- Take a depreciation expense: “There’s no cash that actually goes out of your pocket when you take depreciation, but it can be usually increased through various strategies so that you actually show a loss for tax purposes despite actually generating positive cash flow,” said Thomas Castelli, a tax strategist with The Real Estate CPA, on a recent Motley Fool podcast. New this year: A 100% first-year bonus depreciation “While previously, business owners were able to deduct up to 50% of the cost of assets that they purchased for their business in one year, this amount has now increased to 100%. Starting in 2023, however, the amount of bonus depreciation that you can claim will be reduced by 20% every year.
- Form a business entity. “This is done largely for asset protection purposes rather than tax purposes,” said Heather Silverman, CEO and co-founder of Stessaand Brandon Hall, the CEO of The Real Estate CPA, who together created a 2018 Real Estate Tax Strategy Guide. “It is important to note that you should almost never put rental real estate in an S or C corporation. These often incur negative tax consequences when assets are transferred out of the entity for estate planning or other reasons,” they said. The new tax law allows for a 20% deduction on pass-through income on sole proprietorships, LLCs and S corps.
- Consider a 1031 exchange.Section 1031 of the IRS tax code allows a real estate investor to defer paying capital gains taxes on an investment property upon its sale if a “like kind” property is bought with the profit from the sale. Get more details on 1031 exchanges and the changes in rules surrounding them for 2019 in this recent article from TheStreet.
- Keep good records. This may sound like a no-brainer, but not all of us are the super organized type, and records are important at tax time and all year long. The importance of keeping organized, detailed, and up-to-date records cannot be understated. Doing so will allow you to see how much income your rentals are bringing in at any given time, and project future income and expenses.
- Consider hiring an expert. This is the first filing season under the Tax Cuts and Jobs Act. That means real estate investors may be confused about what credits and deductions apply or may be unaware of all the recent changes. It’s important to note that some of the new tax benefits are temporary and will expire in several years.
As always, it is better to be safe than sorry, so make sure you are well informed going into this tax season.
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