Business Management

4 Tax Strategies Smart Investors Consider Implementing at Year-End

Expertise: Business Management, Landlording & Rental Properties, Personal Finance, Personal Development
65 Articles Written
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Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.

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With the new year right around the corner, most people are thinking about sipping spiked eggnog and what they are going to put under their trees. It’s time to unwind, enjoy yourself, and welcome the new year with a bang!

Smart real estate investors are also finalizing their tax strategies. They know that year-end is where you can make pretty significant moves should the situation warrant itself.

Staying true to the holiday spirit of giving, I’m going to give you ideas on last-minute tax moves you can make. But you had better act fast, as time is running out!

1. Update your accounting records and project your total income.

If you read my blogs, you have heard my advice about proper record keeping and being up-to-date in your accounting. It’s so important that I decided to list it first in our year-end tax strategies.

By now, you should have your accounting records per property caught up through the end of November. If that’s not you, stop reading now and grab a bottle of wine, put Christmas tunes on, and get your accounting records caught up.

When clients come to us with great accounting records, we can quite easily help show them what year-end tax strategies make the most sense. Without great accounting records, we can’t project income and are merely playing a guessing game.

I don’t like playing guessing games. I like to estimate income and expenses as accurately as possible so that I can make year-end moves necessary to reduce my income to the desired amount.

Many of our clients know what their tax situation looks like, with about a 98% confidence score, by the first week of December. Accurate accounting records make it easy for a CPA to plug numbers into their tax software and spit out an estimate. We can view the result and easily apply different tax strategies to the pro forma tax return. And then we can pick and choose which strategies we want to pursue.

Talk about flexibility! Knowing what your tax position is before the year is even over is an amazing benefit that your CPA can offer. But your CPA cannot help you if you don't first help yourself.


2. Decide on a cost segregation study and whether 100% bonus depreciation makes sense.

If you know, with a 98% confidence score, what your tax position is going to be, you can easily look at new purchases you made in 2019 to determine if a cost segregation study is going to make sense.

Related: How to Use Flexibility to Dramatically Reduce (or Even Eliminate) Your Tax Bill

A cost segregation study will allow you to accelerate depreciation on your rental properties. The study will allocate the purchase price of the property between 5, 7, 15, and 27.5-year property. As a result, you will be able to depreciate a portion of your property over a shorter life, which results in a higher depreciation expense in the initial years.

Cost segregation studies help immensely when you have large amounts of passive income from your real estate that you need to shelter. They also help when one spouse can qualify as a real estate professional for tax purposes.

Cost segregation studies often cost between $4,000 to $7,000 but will generally produce significant tax savings in the initial years.

And with the 2018 tax law changes, cost segregation studies became so much sweeter. Now you can 100% bonus depreciate any property with a useful life of fewer than 20 years. That means you can fully write-off the 5, 7, and 15-year property identified by the cost segregation study in the year you purchase a rental.

As an example, let's say you purchase a $1MM multifamily property. Your cost segregation study may yield the following results:

  • 5-year property: $175,000
  • 7-year property: $50,000
  • 15-year property: $100,000
  • 27.5-year property: $525,000
  • Land: $150,000

Thanks to 100% bonus depreciation, you can write-off $325,000 (sum of the 5, 7, and 15-year amounts) in the very first year you own the rental property!

You should analyze whether a cost segregation study is going to make sense for you and you need to do it at the end of the year. Why? Because if a cost segregation study isn’t going to help, then we need to explore alternative tax strategies. We don’t want to find out a cost segregation study won’t help after the end of the year because we may be stuck!

Now, just because you decide to pursue a cost segregation study does not mean that you need to initiate one immediately. You can extend your tax returns on April 15th and commission the study in the middle of next year as long as the study is done by the time you file your extended tax returns on October 15th.

3. Contribute to a Solo 401(k) or Self-Directed IRA.

If you are running a business that generates self-employment income, you can contribute to a Solo 401(k) or SDIRA.

These vehicles will allow you to max out contributions at $56,000 ($62,000 if older than 50) with your business income.

I recommend exploring the Solo 401(k) as you can max it out “faster” than you can with an SDIRA. Essentially, this means that you don’t have to earn as much to realize the full benefit of maximum contributions.

Unfortunately, you cannot contribute passive income (rental income) to Solo 401(k)s or SDIRAs. So landlords are out of luck.

Related: 7 Common Myths About Rental Property Taxation—Dispelled

investment philosophy, investing goals

4. Focus on hitting the thresholds to capture the 20% deduction.

If you have taxable income below $157,500 ($315,000 if married), your qualified business income (QBI) will qualify for a 20% deduction. If your taxable income is above those thresholds, you will start to be phased out of the 20% deduction and a deduction on business income will then be entirely eliminated or limited based on W-2 income and the unadjusted basis of business property.

As you can see, it’s important to manage your taxable income and reduce it to be below those two thresholds. It’s important to note that taxable income is not adjusted gross income (AGI). Your AGI is reduced by your standard or itemized deduction to arrive at your taxable income.

Luckily I’ve given you several weapons to arrive at the desired taxable income threshold. To reduce your overall taxable income, you can use all of the strategies in this post.

Cost segregation and contributions to retirement accounts will reduce your AGI which will subsequently reduce your taxable income. Land conservation easements will increase your itemized deductions (since it’s a charitable contribution) which will subsequently reduce your taxable income.

Don’t Wait Until Tax Season to Implement Tax Savings Strategies

If you wait until April to figure out how to reduce taxes, you’re playing the tax game like an amateur. Investors who save loads on taxes are implementing strategies throughout the year. They have their accounting records 100% updated so that they can implement strategies before the end of the year.

They most certainly do not wait until they have a tax return to battle their accountant on various expenses.

Get your CPA on the phone today!

Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.

Which of these strategies will you be implementing? Any questions?

Comment below!

Brandon Hall is a CPA and owner of The Real Estate CPA. Brandon assists investors with Tax Strategy through customized planning and
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    Costin I. Rental Property Investor from Round Rock, TX
    Replied almost 2 years ago
    Brandon, you say “you cannot contribute passive income (rental income) to Solo 401(k)s or SDIRAs”. What if you have an operations/pm LLC handling all property management of your rentals for your holding entity/entities or yourself with a property management contract with PM fees? Would that qualify as self-income and allow to open Solo 401K? Eventually rollover your traditional IRA and continue invest in RE with the funds?
    Wendy Home
    Replied 9 months ago
    Mary H.
    Replied almost 2 years ago
    As I was scrolling down the article, I was crossing my fingers you would mention cost segregation! It’s such a great tax planning strategy that not enough investors utilize!
    Paula Smith Real Estate Broker from Saint George, UT
    Replied over 1 year ago
    Your #1 is my #1 for this year, and spot on! I’ve been terrible (as many are) with keeping records and trying to do it all at the end. Great tips.
    Dayne LaHood
    Replied over 1 year ago
    Great info. Thank you
    James Bryant Rental Property Investor from Richmond, Virginia
    Replied over 1 year ago
    Great summary for year end next steps. Thanks!
    Ruvelexis Veloz
    Replied 9 months ago
    Thanks for the info Brandon as a newbie on real state I feel this content will apply big change to my taxes , of course with my CPA helping
    Susan Armstrong Fisher from Austin, Texas
    Replied 9 months ago
    As a professional in land conservation, legitimate conservation easements are amazing land conservation tools if the true intention is to conserve conservation-value-rich land into perpetuity. Syndicated conservation easements, on the other hand, are inflated tax appraisals meant to generate large & exaggerated tax deductions and could very likely be illegal. They are currently being highly investigated by the IRS's Criminal Investigation Division. I would caution everyone to stay away from them.
    James Winters
    Replied 9 months ago
    Can you provide me an example of a cost segregation study?