Tax Tip #1: Overlooked Deductions
Real estate investors are all pretty good about deducting rental related expenses like interest, taxes, management fees. However, many investors often overlook legitimate deductions that are not property specific. Examples of commonly missed deductions include business related car expenses, business travel costs, business meals, education expenses, membership costs, and home office—to name a few.
Tax Tip #2: Deducting Interest Expenses
Under the new tax reform, the IRS took away the interest deduction related to home equity line of credit (HELOC) on primary homes. However, if you took out a primary home HELOC and used that money for real estate investments, you can still deduct the interest against the rental income or flip income! Make sure you talk with your tax advisor about the best ways to track and deduct these interest expenses.
Tax Tip #3: Investment-Specific Interest and Taxes
Under tax reform, there is a new limitation on how much can be deducted for property taxes and mortgage interest on primary homes. Please note that these limitations do not apply to real estate investments. As such, whether you are a landlord or flipper, you can still generally fully deduct the interest and taxes for your investment properties.
Tax Tip #4: Bonus Depreciation
Tax reform did provide 100 percent bonus depreciation in 2019. So, if you are a real estate investor who is buying appliances, furniture, equipment, laptops, and other assets for your real estate business, you may be able to write off up to 100 percent of those costs immediately rather than having to take depreciation over multiple years. Remember, bonus depreciation strategy can be used with or without a legal entity, and it can be used with new or used assets.
Tax Tip #5: New 20% Tax-Free Treatment
Wholesalers, flippers, syndicators, real estate brokers, and real estate agents may all be eligible for a new 20% tax-free treatment under the new tax reform. This means that if you have eligible taxable income of $100, the first $20 of that may be completely tax-free! You would then only pay taxes on the remaining $80.
Tax Tip #6: Safe-Harbor Rules
You may be wondering: What about landlords and investors of short-term rentals? What about investors doing the BRRRR strategy? That income potentially also has the ability to receive a 20% tax-free treatment. The IRS came out with some safe-harbor rules on what you need to do in order to obtain that benefit.
Tax Tip #7: Opportunity Zones
Are you looking to sell your appreciated rental property but don’t want to pay capital gains taxes? Or maybe you are looking to sell some of your appreciated stock investments and move that money to real estate? Instead of paying taxes on the capital gains, you now have an “opportunity” with the brand-new Opportunity Zone laws to defer taxes on the gain.
Re-invest your capital gains within 180 days of the sale into qualified Opportunity Zone funds to defer your taxes. After holding onto the Opportunity Zone asset for five years, part of your deferred gain may to be permanently tax-free. In addition, if you hold your investment for more than 10 years, 100 percent of the post-acquisition gain on the Opportunity Zone property may be permanently tax-free!
As always, we recommend you consult an accountant or tax advisor to determine what tax strategies you may, or may not, be able to leverage.
Also Check Out: Key Steps for a Successful House Flip