All real estate investors will benefit from taking a proactive approach to taxes. The reality is there is little you can do retroactively to impact your results once the year ends.
Use the guide below to develop a plan and start implementing strategies now to deliver the best results for the next tax filing season.
Here are some of the most important deductions and strategies to reduce and defer taxes that investors should be aware of:
Depreciation:This is one of the biggest and most important deductions for rental property investors because it reduces taxable income without impacting cash flow. Since land cannot be depreciated, the preferred strategy is to allocate as much of the property’s purchase price to the building as possible to maximize your depreciation expense.
Home Office:As a rental property owner you can dedicate a room, or a portion of a room, exclusively for home office purposes to claim what is often a significant tax deduction. The presence of an official home office also allows you to deduct local transportation expenses, including auto mileage.
Repairs & Maintenance:When you incur repair and maintenance or renovation expenses, you’ll want to classify as much as possible as standard repairs and maintenance to deduct them in the year incurred.
1031 Exchanges and Opportunity Funds:These offer additional methods to defer and reduce taxes. 1031 Exchanges allow you to defer both the capital gains tax and depreciation recapture from the sale of a property and invest the proceeds into another “like-kind” property, often called “trading up.” Introduced by the Tax Cuts and Jobs Act, Opportunity Funds allow you to defer and reduce the capital gains tax from the sale of any capital asset.