Do you ever have those AHA MOMENTS that really make you stop and think?
I was on a conference call a few weeks ago with a fellow investor in a recent deal. He was sharing the story of how he started a few businesses and experienced tremendous success. But then he and his wife sat down to look at their finances, and realized they were giving the government 30-40% of THEIR EARNINGS every year in taxes!
He broke that down for me and said, “We were literally working for the government at least 4 MONTHS A YEAR FOR FREE! It was a sad realization, but made us rethink how we were doing things!” They changed their approach and started investing in real estate, and everything changed.
They started SAVING money on taxes in a legal way and building more wealth. Here’s the thing, you can do that too! It takes time and education, but real estate is more accessible than most people think. The question you should be asking yourself is, “how many months every year am I working for the government for free and how can I change that?”
I recorded a webinar with James Bohan, CPA from Stonehan Accountancy. He is a fellow real estate investor and has a Tax Strategy arm to his business. He has some helpful tips on how to legally save money on your taxes. Feel free to reach out to him directly at:
Website: https://stonehan.com/
LinkedIn: James Bohan
Watch to it here:
I hope this conversation with James provides helpful insight. If you enjoy it, please consider sharing with your network or leaving a review to help spread the word!
Here is a quick summary of some key tax advantages you can take advantage of with tax season upon us:
1. Depreciation Deduction
Real estate investors can take advantage of depreciation, which allows you to deduct the cost of the property over time (typically 27.5 years for residential properties). This can help offset rental income and reduce your taxable income significantly, even if the property is appreciating in value. Bonus depreciation is even more powerful and we talk in more depth about this in the webinar above. If you have other passive gains you’re trying to offset, the paper losses from bonus depreciation can be extremely impactful and help mitigate your tax burden.
2. Mortgage Interest Deductions
The interest paid on loans used to acquire or improve investment properties is deductible. This can be a substantial benefit, especially early in the loan term when interest payments are higher. It’s a great way to reduce your overall tax liability.
3. 1031 Exchange
If you sell an investment property and reinvest the proceeds into another property of equal or greater value, you can defer paying capital gains taxes on the sale via a 1031 exchange. This allows you to keep more money working for you instead of paying taxes upfront.
4. Capital Gains Exclusion
For property owners who sell their property after holding it for more than a year, long-term capital gains tax rates are generally more favorable than ordinary income rates. Additionally, if you meet certain criteria, you can exclude up to $250,000 ($500,000 for married couples) of the gain on the sale of your primary residence. That’s tax free money in your pocket!
5. Operating Expenses
Many of the expenses involved in managing and maintaining an investment property are tax-deductible. This includes property management fees, insurance premiums, repairs, utilities, and even property taxes. These deductions can help reduce your taxable income.
6. Opportunity Zones
If you invest in qualified opportunity zones, you could benefit from a deferral of capital gains taxes, and in some cases, even a complete exclusion of gains from your opportunity zone investments.
Being proactive now with your real estate tax strategy can help you optimize your returns and reduce your tax burden. Whether you’re seeking advice on specific deductions or looking to evaluate new investment opportunities, make sure to consult with a tax professional who understands real estate investing.
Remember, the tax landscape changes every year, so staying informed is key to making the most of your investments.
If you have any questions or need assistance, feel free to reach out. We’re here to help you build a smarter investment strategy.