4 Best Real Estate Tax Hacks for Residential Investors
When it comes to residential real estate, the most successful investors carry the best real estate tax hacks in their back pockets! From tracking your expenses to learning the most valuable loopholes, the right tax planning strategy can help you maximize your dollars and keep more of your hard-earned profits when tax season rolls around! To help you start in the right direction, our tax pros are here with some of our best real estate tax hacks!
Our Focus: Residential Property Investors
Before we get down to business and share our best real estate tax hacks, we want to call your attention to the 2 types of investors we’ll be focusing on:
Although our primary focus in this article will be tax hacks for flippers and landlords, we will be highlighting quite a few tips that can also apply to other areas of real estate investment. Especially if you are a newcomer to the world of real estate investment, some of the tax hacks we will be sharing can help carry you toward loftier ambitions, like becoming a certified real estate professional! So, without further ado, read on to unlock some of these pro tips!
Best Real Estate Tax Hacks
1. Timing is Everything
It takes a special kind of person to successfully flip properties. Not only must you become a jack of all trades, but you must learn to be incredibly patient! Especially if you flip properties for clients, it’s vital that you stay multiple steps ahead of tax deadlines. For instance, if you flip and sell a property, it’s best to avoid closing at the end of the year, since a large chunk of your profits will be eaten up by taxes. On the other hand, if you buy a property that you plan to flip and sell at the end of the year, it’s wise to purchase your building materials now; that way, these expenses will be tax deductible in the same year! This same rule of thumb should be applied if you hire a contractor to make repairs on your flipped property. In order to deduct the repair expenses in the same year, tackle the work now, rather than later!
2. Learn the IRS Ins and Outs
For many who are new to property flipping, it can come as a surprise that the IRS will usually regard your flipping activity as a trade or business, rather than a capital investment. As such, your flips are treated as inventory. So, why is it important for you and your CPA to understand these specifics? Simply put, the IRS taxes the profits you make from a “trade or business” as they would ordinary income. Furthermore, your net profits will be subject to self-employment tax on top of ordinary income tax rates! So, if your flipping activity is regarded as a trade or business by the IRS, taxes will take a rather large bite out of your profits. While you can’t wave a magic wand and change how the IRS treats your flipping activity and profits, you can enlist the help of a savvy CPA to track your money and plan for the future!
Best Real Estate Tax Hacks
3. Active Vs. Passive: The Difference Matters
In most areas of real estate investment, the terms “Active” and “Passive” will be a part of the conversation. To start, you’ll need to understand the difference between active and passive rental properties. Secondly, you’ll need to understand the distinction between active and passive losses, when it comes to your investments and tax planning. Assuming you are not a qualified real estate professional (yet!), the IRS will consider your real estate rental income to be passive. While active income like business or investment income are usually considered active, they are still taxable. Ultimately, it’s a good idea to find a CPA who is well-versed in the world of real estate investment, and who can plan your tax strategy accordingly.
4. Document Everything
Any experienced landlord doesn’t need us to tell them that documenting everything is the key to successful tax planning. If you, like many other landlords or residential property investors, have your sights set on the goal of becoming a certified real estate professional, this is even more imperative. Not only should you document where your money is going, but track and record where your time is going. Document activities such as consulting with architects and contractors, site inspections, and interviewing potential tenants – these records can help demonstrate to the IRS that you are personally participating in managing your properties. Furthermore, even if you are perfectly content as a landlord, keeping track of your expenses will go a long way in helping you and your CPA tax plan.
If a client insists on closing your flipped property by year’s end to qualify for a homestead exemption, consider a compromise. Offer to pay the amount your buyer would save by paying some of the closing costs!
Our Lifetime Tax Advisors are well-versed in the world of real estate investing. From seasoned real estate professionals and syndicators to fledgling investors, we excel at developing clear-cut tax planning strategies that help our clients reach their goals. If you’re ready to take your own success as a real estate investor to the next level, give us a call at (972) 771-6707 or visit our website today!
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