3 Tax Tips for Real Estate Investors
On April 15th every year, we Americans give a portion of our hard earned money to the government. As real estate investors, we are presented with unique opportunities to lessen the impact taxes can have on the bottom line. However, in order to take full advantage of any tax benefits, it's important that investors put themselves in the best position possible to do this.
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Here are three important tips to put investors on the right path:
1.) Get Organized
This advice is applicable anywhere, but pertains especially to taxes. It can be hard to hear, but there are no excuses for having an unorganized business. Organization is an essential skill for any business owner, but especially real estate investors.
From keeping detailed records and receipts to managing expenses, staying organized is critical when tax season rolls around. For those investors that have the ability and the time, self-managing the bookkeeping may be a viable option. There are a handful of very good accounting programs out there that can help in this area.
I actually kept my own books for the first two years I was in business, but quickly learned that it made more sense to contract this out to a good bookkeeper. Most investors learn early on that their time is better spent managing the business rather than buried in the tedium of bookkeeping. Either way, it’s crucial that you have a system in place to record and archive all aspects of the business.
Hire A Good CPA
A good Certified Public Accountant is worth his or her weight in gold. Navigating tax law in order to maximize your profits can be a very daunting task. An experienced CPA, however, will be able to guide you in structuring your business, as well as maximizing your deductions without crossing any legal boundaries. Keep in mind that having your business organized will help your CPA do his job that much more effectively and efficiently.
Use Real Estate Investments to Your Advantage
There are several ways tax law is set up to benefit investing, and particularly real estate. Rental properties are fantastic in this regard, as you get to depreciate the structure of the property over the next 27.5 years. This depreciation can be a great way to offset any cash flow income the property may be generating. At the same time, the real estate is likely appreciating in value without incurring any additional tax liability as a result. Once you decide to sell the property, any income earned as a result of appreciation is treated as capital gains as opposed to income tax (which is typically much higher). Typically, selling property that you have owned for more than a year can fall into this category.
And of course investors have the ability to capitalize on another tax savings known as a 1031 exchange. A 1031 enables investors to defer the capital gains tax by moving profits from the sale of one property directly into the purchase of a new property. By continually deferring tax liability from the sale of properties, many investors have amassed real estate fortunes without ever having paid taxes on the gains from those properties.
Again, I cannot stress enough the importance of partnering with a knowledgeable CPA who has a good understanding of real estate. A good CPA can help formulate tax saving strategies that will put you on the road to prosperity. While most people consider taxes a necessary and unpleasant annoyance to be dealt with once a year, the savvy real estate investor will use the tax laws to not only save money, but earn more in the long run.