When it comes to taxes for real estate investors, tax season doesn’t have to be such a drag. We’re sharing 5 things to do as a real estate investor that can cut your tax bill this year‼️
When you start investing in real estate, you’re doing two things:
- Totally kicking up your passive income streams (hellllooo, cash flow)‼️
- Dealing with the possibility of a “umm….” tax bill comes January.
Here’s the thing, though — that does NOT have to be your reality. There are actually tons of tax benefits to real estate, and there are also several ways you can *legally* shrink your tax bill each year.
Trust us here 🤓: investing in real estate can help your tax bill, NOT just add to it. And, when you approach doing your taxes with saving some cash in mind, you can make a really big difference in what you owe and what you don’t have to pay.
It’s all in getting a little creative and using some moxie to do it, ya know?
(Plus, who doesn’t love saving on taxes? Let’s be real here. After all, you’re already real estate investing… so we know you love making moves.)
Working my way through maze of life Phoenix | AZ
When it comes to taxes for real estate investors, who should do ‘em?
Taxes can be headache paperwork and number-wise, from reporting rental income to determining capital gains — so we’re going to go out on a limb here and suggest that you enlist a tax professional to help you out.
Great tax professionals and tax accountants know how to get you the tax deductions and credits you need and are really great at using your real estate investment properties to your tax advantage. However, you don’t have to outsource it — you can definitely do it yourself, and you can find tax benefits on your own, too.
However, before you start on your taxes, get all your ducks in a row and nearby — because once you start, it’s a heck of a lot harder to start again.
Make sure you have the right numbers, the info you need to back it up (because no one wants an audit), and the paperwork and digital files you need at your side. It’s also a good idea to have the tax benefits you want to take advantage of on hand.
And then go for it, friend — if you can invest in real estate, you CAN do your own taxes!
5 Steps to Cut Your Tax Bill
No. 1 Make big use of your deductions
This might sound like a “duh” thing to lead off with, but your first and most effective step in cutting your tax bill comes down to the deductions you can claim on your taxes. As a real estate investor, there are many tax deductions you’ll qualify for that other people don’t — and they can start cutting big bucks off of your tax bill.
Wondering about some common real estate tax deductions you may be able to claim? The benefits of real estate are obvious here — so here’s a (non-exhaustive) start:
- Home office deduction (we HAD to remind you about this one — it’s just so easy)
- Any depreciation on the properties you’ve invested in, whether they’re rental properties or not
- Amortization fees
- Interest expenses from your property loan, otherwise known as mortgage interest
- Property taxes, escrow, and insurance costs
- Ongoing maintenance on the property
No. 2 Conversion, conversion, conversion
Capital gains are taxed at a different rate — and, as a real estate investor, you LIKE capital gains. They’re what make you moolah during the year.
They’re also taxed at 20%, whereas our salaries can be taxed up to almost 40%. It would make sense that if you could convert your income from a high tax rate (close to 40%) to something closer to 20%, it would be a no-brainer… right?
Conversion lets you do that with the 20% Pass-Through Deduction that passed in the Tax Cuts and Jobs Act.
Essentially, you can deduct up to 20% of your real estate investing business income off of your taxes as pass-through income — which is great for self-employed real estate investors that have a sole proprietorship, LLC, or an S corporation.
While this doesn’t work on your capital gains themselves — only on your qualified business income and expenses, as you’ll have to pay capital gains tax — it can cut big money off of your tax bill, letting you take up to 20% off of your taxable income.
No.3 Use tax brackets
You’ve probably heard of tax brackets, yeah? Higher tax brackets = higher tax rates, while lower tax brackets = lower tax rates. While not everyone can utilize this technique, there are some “loopholes” that let you use tax brackets to your advantage — like paying your kids up to $12,000 a year to help in your business (since they’re kids, they won’t pay taxes anywhere up to $12,000).
You could even use the corporation tax advantage (corporations are only taxed at 21%), become a small corporation, and do your taxes that way. This is where we’d recommend enlisting the help of a tax professional — but it’s 100% worth asking. They can help you make sure you’re doing this right since it can get sticky and confusing fast.
No.4 Tax credits
Claiming tax credits is kiiiinda the easiest way ever to cut your tax bill 😯, and it actually… cuts it, no crazy math or subtractions required — which we all love. Being a real estate investor leads you right to some tax credits, too.
Wondering about a few you may be able to claim if you’re into real estate investing? Here are some:
- Rehabilitation credits, if you’re renovating an income-producing historic building
- The residential energy credit, which covers a portion of eligible energy-efficient projects
- Low income housing credit, if you invest in an eligible low-income rental building
No. 5 Defer your income
If worse comes to worst and you NEED — not just want — to cut down on your tax bill, consider deferring it to a year when you may be in a higher tax bracket. However, we’d recommend against this for the most part.
Bonus – Invest in Multifamily Apartment Syndication to Cut Your Tax Bill
We know we promised you only 5 Things to Do If You Want to Cut Your Tax Bill This Year, but we can’t help to add a bonus here. You may know it, you may have heard we said it… yes, yes, you can cut your tax bill this year by investing in multifamily apartment syndication that yields “phantom losses.”
You may be wondering how could that possibly be when your investment is cash flow producing, etc., well, one of our mentors told us that “tax laws are essentially series of incentives.” It’s a way for the government to “encourage” us to do what they want.
By providing clean and affordable housing to people, we are given massive tax breaks. Therefore we get what’s called “phantom loss” per each investment we made.
For example, one of our $100K passive investments, yields $83,000 in a phantom loss that we used to offset any capital gain we may incur during our investment.
When you invested in stock you have to pay for the capital gain when you cash out on it right?
Well, in multifamily apartment investing, you most likely won’t have to be when we exit the deal simply because over the year you have accumulated so much of the “phantom losses” that they offset any capital gain for you.
It kinda goes without saying (but not really), that we’re not tax professionals — and we’re not licensed to give you tax advice. So, take it from us that these are some suggestions that have worked for us, and contact a tax professional for any actual questions.
And, if you’re ready to take PASSIVE income by the reins (the tax benefits are there, friends!)… ✌️
Come join us in The Kitti Club — where we’ll make real estate investing make sense to you.
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