Tax Tips For Real Estate Investors

Tax time is stressful for everyone, especially for real estate investors. Just like any other business owner, real estate investors have the opportunity to write off expenses that lower their tax liability.

If you’re a real estate investor, before you file your taxes this year, learn the top tax tips every real estate investor should know.

Know The Difference Between Short- And Long-Term Investments

The IRS differentiates between short- and long-term investments. In other words, they tax these investments differently. In addition, long-term investment capital gains taxes are usually lower than short-term investment capital gains, so keep that in mind as you determine your strategy and diversify your portfolio.

Short-term are those investments you’ve held for less than a year (which are typically fix and flips). Long-term are those investments you’ve held/are holding for over a year (which are typically rental properties or any property you bought and couldn’t sell in that timeframe).

Track Your Qualified Expenses

As a business owner, you can write off a lot of your business expenses. You do have to track your expenses to write them off, however. Think of expenses like marketing fees, insurance, business travel, mortgage interest on the investment homes, and any professional services you may require to run your business. 

The best method is to keep a record of all of your expenses throughout the year. Then, talk to your CPA at tax time to determine which expenses are eligible as tax deductible. There are a lot of options to go paperless, such as scan receipts, bills, and canceled checks, ensuring you have a copy of each expense.

Don’t Assume All Repairs Are Fully Tax Deductible

Not all home improvements are fully tax deductible in the year you conduct and pay for the repair. If a repair is a capital improvement, it becomes a depreciating expense. In other words, you may need to take a prorated amount of the deduction each year rather than the full amount in the year you conducted and paid for it.

There is a fine line between a repair and a capital improvement. Keep your receipts and talk with your CPA about each expense so you deduct them correctly.

Reinvest Your Capital Gains To Lower Your Tax Liability

If you buy and sell properties, you’ll pay taxes on the capital gains, like you would any other income. But, there’s a loophole.

If you reinvest this money earned into another property, it’s a like-kind exchange. In short, you don’t pay taxes on the capital gains because you reinvested the money right away. Still, work closely with your CPA. If you have any capital gains outside of the money you reinvest, you may owe taxes on that portion of the funds.

Avoid Being Classified As Self-Employed

If the IRS considers your investments a business rather than investments, you could get hit with double FICA taxes, also known as the self-employment tax, for which you will pay a total of 15.3 percent versus 7.65 percent in taxes. 

To avoid the IRS classifying you as self-employed, make sure it’s obvious that you reinvest the funds earned from the sale of a home in another investment. Whether you buy another property, use the money as a downpayment, or make improvements on another property you already own, it’s evidence that you’re an investor, not a business.

Hire A Qualified CPA

Taxes are already complicated for the average person or business, but they are even more complex for real estate investors. Hiring a qualified CPA will ensure you take advantage of all eligible deductions, you’ve classified the right way to avoid excess taxation, and you file the proper returns to avoid an audit.

Take Advantage Of Your Tax Breaks 

Keep a careful record of your expenses, know the difference between a passive and active investor, and take advantage of like-kind exchanges to reinvest your money and defer taxes on your capital gains.

Work with a CPA and, with the right strategy, you can offset high tax liabilities and maximize your profits, realizing lucrative returns on real estate investments and diversifying your investment portfolio. 

If you’re a real estate investor who wants to take full advantage of these tax tips, check out the Roofstock Marketplace to get your hands on another investment property.

Photo by Kelly Sikkema on Unsplash