As a real estate investor, you may find yourself worrying about how much you will have to pay in taxes and what kinds of damages the yearly tax bill can have on your portfolio. You may want to keep that amount as low as possible and keep more of your revenue for yourself.
Still, you must ensure you abide by all of the tax laws that pertain to your investments. You can use some simple strategies and consult with an experienced real estate investment service like Upside Investments to leverage your tax advantages for financial growth.
Invest in Real Estate for More than Just Wealth
As counterintuitive as it may sound, you should invest in real estate for more than just the wealth-growing opportunities. In fact, simply owning properties is only one aspect of successfully investing in real estate.
Part of cultivating the best advantages of your properties involves operating and managing them effectively. Even before you buy them, you should ask yourself if you are really ready to be a good steward of them. You should also consider if you are qualified to manage and operate them so you can get their full advantage.
Similarly, you should review how much time and money it can take to invest in and take the best care of your properties. They may require a significant amount of energy and resources to manage and take care of before you can leverage any tax benefits from them.
Use 1031 Exchange Laws
Another method of leveraging your tax advantages for financial growth is to use the 1031 exchange laws to your benefit. These laws help you strategically navigate depreciation of your properties. You can use them to swap one property for another without incurring a crippling tax burden.
Essentially, these laws let you shift the form of one of your properties without cashing in or incurring capital gains on it. When you exchange a depreciated property, you could trigger what is known as a depreciation recapture, which the IRS then taxes as ordinary income.
When you use 1031 exchange laws, you can sell one property and buy another without this depreciation recapture. You also defer capital gains and get the benefit of compounding interest at the same time. You avoid a tax burden that you may find challenging to pay right now.
Invest in Opportunity Free Zones
The federal government created what are known as Opportunity Free Zones in 2017. The IRS describes them as economic development resources that allow investors to buy distressed properties in the U.S. and grow their wealth.
They actually offer a number of tax advantages, such as not having to pay taxes on them if investors hang on to them for a minimum of 10 years. You also avoid the risk of depreciation recapture when you buy properties in opportunity free zones.
As an investor, you need to do your research and find opportunity free zones in cities and states in which you prefer to invest. You also need to understand the requirements and responsibilities that come with buying properties in them. You can find out more about opportunity free zones and the tax advantages that come with them on the IRS website.
Retain a CPA to Calculate Depreciation
As a real estate investor, you should also retain and work with an experienced certified public accountant to determine any depreciation of properties that you own and leverage tax advantages from them. Real estate depreciation essentially shelters your investment income during tax seasons. A CPA can determine quickly and reliably how much your properties have depreciated in value for the current tax year.
An experienced CPA can also advise you on matters like cost segregation analysis. This analysis allows you to identify opportunities to basically speed up the standard 25-year depreciation schedule. You may, in fact, get more depreciation value for your investments upfront when you depreciate some of them over a five-year schedule instead of the typical 25-year schedule.
Design and Implement a Solid Business Plan
You likewise need to create and utilize a solid business plan for the real estate that you invest in and add to your portfolio. Many first-time real estate investors make the mistake of proverbially playing it by ear instead of having a practical business plan in place when they buy properties. They risk losing money and gaining expensive tax burdens as a result.
Instead of making this rookie mistake, you should make a plan that involves outlining critical factors of your investments, such as how you will:
- Increase their value
- Maintain them
- Operate them
- Keep them competitive
You should also review your investments and identify what elements may need to be addressed first with them. As an investor, it can be critical that you have this plan in place before you seek out financing to buy them or even put down a deposit on them.
Rely on Professional Counsel
Finally, you can leverage tax advantages for financial growth of your investments when you rely on the professional counsel of real estate investing experts. These experts can include:
- Tax attorneys
- CPAs
- Brokers
- Real estate investment services
When you reach out to and consult with them, you can find out by what laws you must abide when investing in properties. You may avoid running afoul of city, county, state and federal tax laws and incurring fines and large tax bills that you find challenging to afford.
You can also learn how to transfer and trade properties so you avoid incurring capital gains that the IRS will tax as income. Rather than research these laws and try to figure them out on your own, you can build a team of real estate professionals, consult with them regularly and rely on the counsel they provide you.
Knowing how to leverage tax advantages for financial growth can be perplexing for even the most experienced of real estate investors. Do not navigate this complex process alone. Contact Upside Investments today to learn what financial and tax strategies to use for your properties.
