Real Estate Tax Guide (2024)
Talk about these 6 strategies with your CPA to lower your tax bill
Today I’m sharing 6 strategies I recommend talking to your CPA about this tax season.
As a real estate investor, my best advice is to find a good CPA.
It saves you money
It saves you stress
It saves you time
A good CPA might cost you. But over decades, it’ll save you millions.
I’m a fan of TrueBooks. But I recommend asking people close to you for referrals to find the best CPA for you.
Talk about 6 tax-saving strategies with your CPA
These strategies have saved me millions over the past decade.
1. Depreciation
Benefit: Depreciation is a non-cash expense that allows investors to write off the cost of a rental property over its useful life. For residential properties, the standard depreciation period is 27.5 years. This deduction can offset rental income and reduce taxable income.
Example: If you purchase a rental property for $550,000 (excluding land value, which is not depreciable), your annual depreciation expense would be $20,000 ($550,000 / 27.5 years), lowering your taxable income by this amount each year.
2. Mortgage Interest Deduction
Benefit: The interest paid on a mortgage for a rental property can be deducted from your taxable income. This is often one of the largest deductions for real estate investors and can significantly reduce your tax bill.
Example: If your annual mortgage interest payment is $30,000, you can deduct this full amount from your rental income, reducing the overall taxable income.
3. Capital Gains Tax Rates
Benefit: When you sell a rental property, the profit is subject to capital gains tax, which is lower than ordinary income tax rates and lowest if you hold the rental for more than one year.
Example: If you sell a multifamily property you've held for more than a year and make a profit, this gain would be taxed at the long-term capital gains rate (15%), which could be significantly lower than your marginal tax rate (30-40%) on ordinary income.
4. 1031 Exchanges
Benefit: The 1031 exchange, also known as a like-kind exchange, allows investors to defer paying capital gains taxes when they sell a property and reinvest the proceeds into another investment property.
Example: If you sell a multifamily property for a profit and use all the proceeds to purchase another property, you can defer the capital gains tax, allowing you to use the full sale proceeds towards the new investment.
5. Operating Expenses Deduction
Benefit: The IRS allows multifamily property owners to deduct ordinary and necessary expenses incurred in owning and operating the property. This includes property management fees, maintenance, repairs, utilities (if paid by the owner), insurance, and property taxes.
Example: If you spend $40,000 in operating expenses for your multifamily property, you can deduct this amount from your rental income, reducing your tax bill.
6. Cost Seg Studies
Benefit: A cost segregation study can accelerate depreciation deductions by identifying property components that can be depreciated over a shorter life span (5, 7, or 15 years) rather than the entire building over 27.5 years.
Example: Through a cost segregation study, certain parts of your multifamily property (such as appliances, carpeting, and landscaping) can be classified under shorter depreciation schedules, increasing your deductions in the early years of ownership.
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That’s all for this week!
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Marc Kuhn
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