Real estate investors know how important it is to save money at every stage when buying or selling property, including when it’s time to file a tax return. In fact, using the right tax strategies can save you thousands of dollars, and sometimes much more.

Building long-term wealth requires careful planning and investing during every step along the way. This article explores some of the most effective tax strategies that every real estate investor should know right now.

Income Deductions

If you own investment properties, one of the most important ways that you can save money is by taking advantage of tax deductions. While some opportunities to save may be obvious, others get overlooked by real estate investors.

Here are some tax deduction strategies that real estate agents can help you use:

• Maintenance and repairs: These include materials for everyday repairs, including plumbing issues, standard wear and tear, and painting. It may also include labor costs for employees, contractors, or vendors.
• Taxes and fees: Property taxes, mortgage interest fees, insurance payments, and HOA costs.
• Operating expenses: Utilities, travel costs when visiting properties, and office supplies for daily business operations.
• Qualified Business Income (QBI): The QBI deduction may allow some real estate investors to deduct up to 20% of their rental income, but it’s dependent on IRS regulations and real estate type. Unsure if you qualify? Ask one of our real estate agents.
• Use depreciation: Real estate investors may be able to deduct the depreciation of an investment property over time. The IRS has strict guidelines, and Haitian Realty can help guide you through them.

1031 Exchanges

For real estate investors planning to buy a new property, 1031 exchanges can help defer capital gains taxes. By reinvesting profits after selling a property into a similar property you plan to buy, investors may defer taxes if they follow IRS requirements.

It’s important to note a couple of very strict timelines:

• Identification period: Real estate investors have 45 days to report the prospective property to a Qualified Intermediary. You’ll need to file paperwork and be sure to enter any required details.
• Exchange period: You’ll have 180 days to complete the purchase of a new property after reporting the original sale. This 180-day timeframe includes the identification period.

Still have questions? Haitian Realty is happy to help you answer any questions about this unique yet complex tax strategy.

Cost Segregation

Cost segregation is a depreciation strategy that can allow you to take advantage of deductions sooner than you otherwise would. Rather than the standard timeline for real estate depreciation (27.5 years for residential and 39 years for commercial), you may be able to deduct certain aspects of a property sooner.

Some items that may qualify for depreciation sooner include:

• Furniture
• Carpet
• Toilets
• Sinks
• Driveways
• Fences

Depending on what you deduct, the depreciation timeline may range from 5 to 15 years. Because the IRS regulates these types of deductions, it’s best to work with trained experts.

Capital Gains Deferral

Real estate investors may be able to defer or cut out certain capital gains taxes. While the 1031 exchange is one of the most well-known examples, there are other tax strategies you can use, including:

• Installment sales: Real estate investors who finance a sale can claim principal from the payments received. This strategy may prevent a larger share of income from a home sale from being reported in a single year, helping them avoid a higher income bracket.
• Primary Residence Conversion: If you are planning to turn a rental unit into a primary residence, as much as $250,000 for single filers or $500,000 for married couples may be exempt from capital gains tax.
• Qualified Opportunity Zones (QOZs): This strategy allows you to reinvest gains from other sales (stock, business, real estate) to defer capital gains taxes.