Clients often reach out for advice on how to further maximize or leverage their real estate investment. Many property owners’ first instincts are to maximize revenue by increasing the property’s income, improving the property’s quality of tenants, or exploring other creative revenue streams the property will allow.
Once your property is maximized, what’s the next step? Many investors or owners of real estate completely overlook tax benefits that exist when owning real property. Real estate is often considered the greatest tax shelter, for good reason.
Here are a few real estate tax tips you may have not known that will increase your bottom line and generate protected wealth.
Corporate Tax Structure: In 2018, there has been a significant change to how corporations are taxed. Under the new tax law, corporation tax has been reduced to 21 percent! In previous years corporations have been taxed at a 35 percent rate. Why is this significant to property owners? Investors of real estate should place their properties within a company for many reasons. Owners will experience various benefits, including limiting liability and sheltering a properties income. This simple yet powerful change adds 14 percent more revenue in your pocket.
Business Equipment Depreciation: Another crucial change to the 2018 tax code that directly benefits real estate investors is the addition of newly depreciable items/equipment for residential real estate owned by a company. This means that HVAC units, roofs, and other items belonging to the residential property can now be written off. Traditionally, a company could only depreciate items such as computers, furniture and other items inside an office that were needed to conduct business. This tax law extension will save thousands for the savvy real estate investor.
Tax-Free Leveraging: One of the best parts about owning real estate is the ease of borrowing against it. Investors may not be aware of the tax benefits of leveraging a property and refinancing. Investors and owners are allowed to refinance their property while not being responsible for any tax of that debt. Essentially, this allows real property owners to take out a tax-free loan and still keep the added tax benefits such as depreciation.
1031 Exchanges: What do you do when it’s time to sell your property and you are selling for a gain? The best option is to complete a 1031 exchange, in which you exchange a sold property for another like-kind property. The IRS will allow investors to reinvest this capital tax deferred into a new property. Eventually, you will have to pay tax on the gains, but very important shelter allows an investor to build more wealth with their capital over the long run.
Hold investment properties for over 365 days: In a hot market, real estate investors scramble to find that perfect fix and flip. Making quick money while the market is good appeals to everyone. However, if you sell an investment in less than 365 days, you are subject to short-term capital gains. The difference is staggering compared to selling a property after owning it for more than 365 days. Think twice about your fix-and-flip strategy.
These are just several options to make your real estate go the extra mile. To learn even more ways to maximize your property, find that perfect investment property, sell your investment property, or find a like-kind property for a 1031 exchange, please contact me - Brian McGowan – at Brian@Casandraproperties.comor call me at 718-816-7799, ext. 110.
I have years of experience in advising clients and selling investment properties, and can be a great resource in generating and preserving your real estate wealth.