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4 Incredible Tax Strategies You’ve (Probably) Never Heard About

Philip Michael
4 min read
4 Incredible Tax Strategies You’ve (Probably) Never Heard About

One of the most beautiful benefits of real estate is the tax credits it allows, the most famously known being the 1031 exchange

In the summer of 2018, while guest hosting a show, I came across ANOTHER strategy, a variation of the 1031 called the 721 exchange—aka “real estate’s best kept secret.” 

(Here’s an article I wrote in Entrepreneur.com about this.)

I’m currently in the process of selling off one of my first properties, a New York City triplex, where I stand to make a decent spread on the purchase price. Naturally, I have to figure out whether to 1031, take the tax hit, or—as would be the obvious choice—to 721 it into one of our developments. 

As fate would have it, I recently reconnected with the czar of this strategy, Julio Gonzalez, real estate investor and CEO/founder of tax advisory firm Engineered Tax Services. As an investor, Gonzalez has built an impressive real estate portfolio since 2001. His latest deal was buying a property for $1M, and then leasing the freakin’ roof to AT&T—for $5 million. 

A bonafide tax expert, Gonzalez works with Congress, the Senate, and the Administration on tax code.

“I’d say 96 percent of large developers aren’t aware of the tax strategies and tax credits made available to them,” Julio says. “Just the instant depreciation strategy alone, most developers don’t even know that.”

This tactic allows you to get INSTANT depreciation on any non-structural component of a building. (Including condos. I’ll get back to that strategy in a second.)

We recently sat down to discuss some of the latest tax strategies, what investors—big or small—can do to save themselves a lot of money. 

Here are four little-known tax tactics any investor should know—but probably hasn’t heard about.

1031-exchange

1) Real estate’s best-kept secret: 721 exchange

If you’re a regular on BiggerPockets, you of course know about the 1031 exchange, a very popular tax deferral strategy used by pretty much every professional investor. However, the 721 exchange allows you to take the capital gains and put it into several real estate projects and/or funds.

Unlike the 1031 exchange—which forces you to identify a similar property to buy within 45 days, a timeframe that may force you into a subpar deal—you can identify several and diversify your capital gains. 

So how do you do it? And what does it cost? “You have to talk to your CPA and have him do the paperwork for you,” Julio said in our sit-down. “But the costs are in the $1,500 range.”

2) Cost segregation and INSTANT depreciation

I personally loved the sound of this and couldn’t wait to scribble it down. Obviously, some of the coolest things about real estate investing are the tax benefits it grants you, including depreciation. 

Related: Depreciation: Learn the Basics Ahead of Tax Day!

In short, you can write off the value of your building in taxes over the course of 27.5 years. The logic being that a building’s physical structure loses value over time due to wear and tear. (Even when everyone, including the IRS, knows that it really doesn’t.)

One little-known tax hack, however, is the instant depreciation method through a cost segregation analysis of your investment property. The non-structural components of the building can be written off.

“What you do is you do a forensic study of building to determine what’s structure vs. non-structure,” Julio told me. “From there, you can expense the non-structural component immediately.”

Even better? You can use it on condos! Which are, by definition, almost entirely non-structural. In other words, you can credit the depreciation savings you’d collect over nearly 30 years immediately. 

(Here’s an example in actual math, courtesy of BiggerPockets member and CPA Thomas Castelli.)

real estate taxes deductions

3) 179D tax code: energy-efficient tax credits

OK, so the whole point of writing this article is to shed light on little-known strategies—hence why there’s little written about them in the major publications.

So, what is the 179D? According to government sites, the 179D has been a temporary provision of the U.S. tax code, originally included in the Energy Policy Act of 2005 as a deduction for 2006 and 2007.

Every few years the deduction expires. From there, Congress includes it in an extender bill, often on a retroactive basis. This is exactly what happened on Dec. 20 by the President, per Bloomberg—the only mainstream media source I could find even detailing this.

Related: The Battle for the Throne: Opportunity Zone or 1031 Exchange?

“The 179D allows you tax benefits for achieving certain energy-efficiency thresholds,” Gonzalez explained to me. 

Here’s how Accounting Today, a hardcore trade publication for the accounting industry, explains the 179D tax code: 

“The 179D allows investors a deduction of up to $1.80 per square foot for the installation of energy efficient property. It behaves similarly to bonus depreciation as it is an immediate write-off, which reduces the depreciable basis of the asset.”

One thing to pay attention to here. In order to be eligible for this tax code, your building has to be 10,000 square feet and up. The costs to do this come out to 2 to 3 cents per square foot, Gonzalez said.

So, how do you know whether your building is energy efficient? “It goes according to ASHRAE standards,” Julio explained. “They come up with benchmarks; you just have to beat them.” 

4) The 45L tax code: more energy-efficient tax credits

This one is potentially more potent for younger investors with smaller properties.

Similar to the 197D, the 45L gives tax credits based on energy efficiency. This tax credit is equal to $2,000 per residential unit or dwelling to the developers of energy efficient buildings. 

Only difference is that eligible properties include three-story/smaller multifamily. Meaning qualifying properties include apartments, condominiums, townhouses, and single family homes. “Other than that, it’s pretty much the same [as 179D],” Gonzalez added.

So, how does this one work? “You can model it based on IRS-approved software,” he said. “Takes a week to get done.” (Here’s a list from the government of approved software, should you decide to go this route.)

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.