Do you want to take advantage of all the tax savings that are available to real estate investors under the new tax reform?
As a tax advisor by day and real estate investor by night, I’m here to share eight tax strategies you must know for 2019.
Tax Tip #1: Overlooked Deductions
As real estate investors, we are all pretty good about deducting our rental related expenses like interest, taxes, management fees. However, many investors often overlook legitimate deductions that are not property specific. Examples of commonly missed deductions include business related car expenses, business travel costs, business meals, education expenses, membership costs, real estate books, BiggerPockets memberships, and home office—to name a few. These expenses can add up during year and help you save some big tax dollars!
Tax Tip #2: Deducting Interest Expenses
Under the new tax reform, the IRS took away the interest deduction related to home equity line of credit (HELOC) on our primary homes. However, if you took out a primary home HELOC and used that money for real estate investments, you can still deduct the interest against the rental income or flip income! Make sure you talk with your tax advisor about the best ways to track and deduct these interest expenses.
Tax Tip #3: Investment-Specific Interest and Taxes
Another pitfall under tax reform is the new limitation on how much can be deducted for property taxes and mortgage interest on our primary homes. Please note that these limitations do not apply to real estate investments. As such, whether you are a landlord or flipper, you can still generally fully deduct the interest and taxes for your investment properties.
Related: The Ultimate Guide to Real Estate Taxes & Deductions
Tax Tip #4: Bonus Depreciation
On the bright side, tax reform did provide us with 100 percent bonus depreciation in 2019! So, if you are a real estate investor who is buying appliances, furniture, equipment, laptops, and other assets for your real estate business, you may be able to write off up to 100 percent of those costs immediately rather than having to take depreciation over multiple years. Remember, bonus depreciation strategy can be used with or without a legal entity, and it can be used with new or used assets.
Tax Tip #5: New 20% Tax-Free Treatment
Wholesalers, flippers, syndicators, real estate brokers, and real estate agents may all be eligible for a new 20% tax-free treatment under the new tax reform. This means that if you have eligible taxable income of $100, the first $20 of that may be completely tax-free! You would then only pay taxes on the remaining $80. We actually wrote an entire article on this great new tax benefit—be sure to check it out!
Tax Tip #6: Safe-Harbor Rules
You may be wondering: What about landlords and investors of short-term rentals? What about investors doing the BRRRR strategy? Those income potentially also have the ability to receive a 20% tax-free treatment. The IRS came out with some safe-harbor rules on what you need to do in order to obtain that benefit—again, check out this article for more information.
Tax Tip #7: Opportunity Zones
Are you looking to sell your appreciated rental property but don’t want to pay capital gains taxes? Or maybe you are looking to sell some of your appreciated stock investments and move that money to real estate? Instead of paying taxes on the capital gains, you now have an “opportunity” with the brand-new Opportunity Zone laws to defer taxes on the gain.
Re-invest your capital gains within 180 days of the sale into qualified Opportunity Zone funds to defer your taxes. After holding onto the Opportunity Zone asset for five years, part of your deferred gain may to be permanently tax-free. In addition, if you hold your investment for more than 10 years, 100 percent of the post-acquisition gain on the Opportunity Zone property may be permanently tax-free! Check out our blog for more info on this strategy.
Tax Tip #8: Paying Towards Retirement
Before the end of the year, make sure you talk with your tax advisor on ways to pay towards your retirement rather than to pay the IRS. You may be able to contribute up to $56K to reduce your tax bill and have that money grow for you tax-deferred in real estate assets! The best type of retirement account and the maximum amount you can contribute will depend on the amount and type of income you earn in 2019. Make sure to strategize with your tax advisor about this opportunity before filing your taxes.
That is all for the eight tax tips you must know for 2019. As you probably already know, it’s not just about how much money you make–it’s about how much of it you get to keep. Thanks for joining us and happy investing!
Looking for expert tax tips to maximize your deductions this year? The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matthew MacFarland is written by experienced CPAs and geared towards investors. Pick up a copy from the BiggerPockets Bookstore!
Which of the above will you be taking advantage of this year? Any questions about these 2019 tax tips?
Leave a comment below!