5 Clever (& Legal) Tax Strategies to Save Real Estate Investors Money

by | BiggerPockets.com

As a CPA a common question I am asked is: “How can I create a tax shelter using my real estate?” Let’s be honest: most of us, including me, do not have overseas bank accounts that allows us to shelter large amounts of income from taxes.

If you are not in the Swiss bank account club, there is no need to worry. It might actually be to your benefit because recently, the U.S government made a treaty with Switzerland to team up together to find and prosecute tax evaders.

You don’t have to open a bank account overseas just to shelter your hard earned money. There are plenty of other ways to be an honest tax payer and take advantage of tax loopholes and strategies. Let’s take a look at some legal tax havens available to real estate investors just like you.

5 Clever (& Legal) Tax Strategies to Save Real Estate Investors Money

Your Home is Your Best Tax Shelter

If you own your home, great news – you are already providing yourself a great tax shelter! The moment you purchased your home, you write away received tax benefits. Your mortgage interest provides you with tax deductions by itself.

Even better news is that if you sell your home and make profit, Uncle Sam may not be able to touch that money. The IRS allows you to sell your home and not get taxed on up to $250,000 of profit if single — and up to double that if married. The main requirement is that you need to have lived in the home as your primary home at least two out of the preceding five years. This can be a great strategy, especially if you are trying to grow your equity and trade up every few years.

Related: Your Tax Write-Offs Could Affect Your Ability to Get a Loan: Here’s How

Be Wise and Invest Wise

You can invest in just about anything or any company these days. The reason I personally choose real estate as my investment vehicle is because it provides me with leverage and cash flow. Another great benefit is you have access to depreciation strategies. This power move allows you to pay a fraction of the total cost of your investment yet still take a deduction for the entire property purchase price.

The 1031 Advantage

Let’s say you purchase an investment property but then decide you want to purchase another. In order to do so without paying any taxes, you can use a tax strategy called the 1031 exchange. This strategy allows you to postpone the taxes owed on the first property and swap it for another property. This is also known as a like-kind exchange.

A 1031 exchange means you can avoid tax on any capital gain on the property by rolling the proceeds of the first property into your second property. Once you are ready to sell the second property, you can use this same strategy again to purchase your third property. A tax free loan from Uncle Sam doesn’t sound too bad, does it? Make sure to speak with your tax advisor and see if a 1031 exchange works for you.

Business Tax Loopholes

Believe it or not, your real estate is a business when it comes to taxes. I am not talking about an LLC or a Corporation. I am talking about the fact that your real estate is a business for tax purposes and may allow you to take advantage of a lot of the tax deductions available to businesses.

Whether you run your real estate business full time or part time, there are business tax shelters available to you. One strategy is to deduct the business use portion of your car, phone, equipment and or home office for your real estate. If you qualify for a home office, you are even able to make repairs on your home and deduct the percentage that is used for your business.

Related: Your Complete Guide to the Real Estate Professional Tax Loophole

Income Shifting Strategies

One more strategy that is essential is to make sure you are paying your kids or spouse if you are able to find something for them to do for your real estate business. These strategies and more may be available to you as an investor, and your tax advisor should be incorporating them into your overall tax plan. If not, it’s time to reevaluate your working relationship.

As you can see, there are lots of tax shelters that may be available to you as an investor. All you need to know is how to apply them to your unique situation. Work closely with your advisor this tax season to see what opportunities are available to you so you can have all of your strategies in place for 2015.

What tax strategies will you be using this year as an investor? Is there anything I missed?

Leave a comment!

About Author

Amanda Han

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.


  1. Excellent article and timely advice since Tax season is upon us. Couple of questions:

    1. When you sell a investment property, you are supposed to recapture the depreciation. So, are you saying that 1031 allows to move that cost to another property that I can buy? What is the time-frame that I will have to buy the other like property/ What does it mean to be “like kind” exchange (can a 4-plex replace a duplex)?

    2. Which one of these can cause IRS audits even if they are legal? Meaning if the ROI is not that much…then don’t do it.

    3. If it is treated as a business, can one put more $$ into self-directed retirement fund vs. the ~$17K limit for regular W4 earners?

    4. There were few BP articles on investing on “Notes” from ROTH IRA. What is your take on that?


    • Joseph Plaugher

      Austin, let me take a stab at your questions:

      1) Yes, using a 1031 exchange will allow you to avoid the depreciation recapture. Also, yes a 4-plex can replace a duplex. This is the most common reason for a 1031 exchange – trading up to a larger property. “Like-kind” can be a house, a storage facility, a strip mall, or a 200 unit apartment community. As long as it’s “real property” (can’t trade your duplex for a Hummer, or manufacturing equipment )

      2) The key is keeping solid records and written explanations for your deductions. For example: when taking the home office deduction, make sure you keep a written calculation for the amount you’re deducting and the original receipts for the utilities/repairs. If you get audited, you’re prepared. No problem.

      3) If I understand your question right, you are asking if you can invest $17k extra in a retirement account because it is business income. I believe the answer is no. Your retirement contribution is deducted independently of your source of income, so this won’t change.

      4) Checkout http://www.themichaelblank.com He has some great info on investing through your IRA.

      Source: Senior year accounting student, soon-to-be CPA, tax strategy enthusiast
      ***This post is an opinion and should not be used as professional tax advice***

  2. 1) In general, yes, you continue to defer the depreciation recapture as well as the capital gain, as long as the new property is not vacant land, and is also in the United States. You have 45 days from selling your old property, to identify your new property (and 180 days from selling your old property, to close on your new property). Yes, a 4-plex can replace a duplex. In general, anything but vacant land or your personal residence is acceptable. You only need to make sure that you are paying more for your new property, than you sold your old property for, in order to totally defer the taxes.


    2) A 1031 exchange does not increase audit probability. In fact, it reduces two significant factors, gross proceeds and AGI. The 1031 will be reported on a 1099-S, showing no gross proceeds, and box 4 checked.

    3) Yes. The easiest and least expensive to set up, is a SEP-IRA for your real estate business. Then you can contribute 25% of your income, up to $53,000.


    4) You need a self-directed IRA for that. The least expensive provider by far for this type of “checkbook IRA” is IRA Services Trust Company. I am not affiliated with them, I just got tired of paying $395/year and more for this type of IRA. As for the notes themselves, as long as you are willing to do your research on the borrower and the property, they can be a solid investment. Since it sounds like it is your first one, I would probably ask someone on here to help you. I would say ask an attorney or accountant, but most have never done any of these types of deals, so make sure you are talking to someone with actual experience. The more the better.

    The above observations are editorial content, and are not legal or tax advice to you.

  3. HI Amanda and thanks so much for advise. also was wondering how could i use funds that I withdrew from a 457 retirement account to star my real estate business as well as to purchase some properties. can I use those funds that I withdrew to offset taxes and use as my business expenses? I HAVE WITHDRAWN the funds already

  4. These are all awesome legal ways to get tax breaks on your estate sale. The one that seemed most interesting to me is A 1031 exchange. It is interesting to me that you can avoid tax on any capital gain on the property by rolling the proceeds of the first property into your second property. I would want to try that.

  5. Great article! I like the fact that these are legal loopholes! Not even loopholes actually, more just clever ways to go about doing business and dealing with money! I would love to start investing in real estate, but I feel like I wouldn’t know where to start once I bought the house. Is there any software available to help me keep track of everything?

  6. benjamin cowles

    Thanks again. Good stuff. Tho if I could get my kids to contribute to the business, if I had some, using the roof over the heads and food on their plates would constitute their wages which would beat any tax savings. Now if we could get sparky to fetch some documents here and there that would be a whole other advanced strategy. But in guess I’m off the subject of taxes.

  7. I’m wondering if someone can answer my question and provide some much needed advice. I co-own my home with a relative; it was the only way I would qualify for a mortgage at the time of purchase a decade ago. I put 50k on the property as a down payment. I have put around 20k into the property in improvements and there is around 65k left on the mortgage. The mortgage is in both our names. The deed is Joint Tenancy Right of Survivorship. It has been my primary residence; however, my relative owns another property in another state that is his primary residence. The capital gains on the property when I sell will be less than 250k. My question is: if I sold my home prior to my relative’s passing would there be capital gains tax owed? Is there any other way to avoid this tax other than waiting for my relative to pass? My relative is very ill; I am trying to figure out if relocating prior to his passing is a bad financial decision on my part and would negate the tax exclusion.

    • Christopher Moran

      Luckily for you, there is a health-related move provision in the law. So, generally, you will still qualify to exclude $250,000 in gain, even if you move now to be with your ill relative, and sell your home later.

      I wish you and your relative all the best.

      You can read about this directly, in IRS Publication 523:


      Here is the relevant text:

      Health-related move. You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold.
      You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.

      You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury.

      Family includes:

      Parent, grandparent, stepmother, stepfather;

      Child, grandchild, stepchild, adopted child, eligible foster child;

      Brother, sister, stepbrother, stepsister, half-brother, half-sister;

      Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;

      Uncle, aunt, nephew, niece, or cousin.

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