Real Estate Tax Strategies to Know

The IRS is the only organization in the United States where you are guilty until proven innocent. If they send you a bill, it is up to you to prove them wrong. Put another way, it is NOT up to them to prove they are right.

This means “We The People of the United States” need to have a basic understanding of the Tax Code and how to take advantage of the opportunities the government puts in front of us in any given year.

A few of the major incentives in the Real Estate space have not changed in years and are worth addressing in today's Blog.

                                          Real Estate Tax Strategies to Know

There are two ways to improve your bottom line on any Real Estate Project -

Increase Revenues or Decrease Expenses

The goal in a perfect world is to do both! Today, we will focus on Decreasing Expenses. More bluntly, we will focus on paying Uncle Sam as little as possible by doing the things he asks us to do.

To do so we will explore the following three ideas -

                                                Section 121 Exclusion

                                                   1031 Exchanges

                                                   Cost Segregation

Section 121 Exclusion - If you own Real Estate or are considering purchasing Real Estate before you die, you MUST know about the Section 121 Exclusion.

IRS Website - “If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.” (Click to Learn More)

Typically, you would need to have lived on the property for 2 of the last 5 years to be eligible. Please ask your accountant for more information at your next sit down!

This is very important to know! Don't underestimate how many people see at the 23 month mark or who only needed to move back in for a few months to save on tens of thousands of dollars in Capital Gains.

1031 Exchange - The biggest downfall to making money tends to be taxes. If you don’t need the money, the government incentives you to continue to invest, grow and stimulate the economy.

To help support you in doing so, they created the 1031 Exchange. If you do not intend to take your proceeds and go on a shopping spree, the IRS is willing to support you on your Real Estate Investing journey. Housing is a crucial area to the economy and they know, they are not landlords but they can make tax changes that encourage landlording…

If you sell a property, follow a few rules and buy another property within 180 days of the previous close, you may be able to avoid capital gains altogether. For now that is… Uncle Sam will eventually want his piece unless you continue to deploy this strategy until you pass away. Currently your beneficiaries would receive the property at its new stepped up or today's “Market Value”.

This strategy is a bit more complicated and would require engaging a 1031 Exchange Intermediary. If you are considering taking advantage of this line in the Tax Code, make sure you don't miss a single deadline or Uncle Sam may be your biggest beneficiary on the deal.

Remember, you are looking for another Real Estate property but that doesnt mean it has to look the same as your past purchase or even remotely be in the same ballpark price wise. The IRS defines similar properties below -

“Like Kind - “Properties are of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.” IRS Website (Click to Learn More)

Cost Segregation - When you buy a residential property, the IRS allows you to Depreciate the value of the property over 27.5 years. Commercial, 39 years. This means that if you buy a $500,000 residential building, the IRS allows you to depreciate $18,181.81 every year for 27.5 years. This helps you save on taxes over time but doesn't help us a whole lot today.

For those in need of a big tax break this year, consider a Cost Segregation Analysis. This looks at not only the value of the property as a whole but in a much more granular manner: fixtures, plumbing, electrical, systems, flooring and more.

These particular items when bought individually have a 5 - 15 year depreciation schedule which allows for an investor to write these items off at a much more aggressive pace.

A Cost Segregation Study does just this. It breaks out the building, bit by bit and depreciates it based on the specific items' useful life, not just 27.5 years. When done correctly, tax savings can be heavily front loaded to help us save on taxes sooner, rather than later!

Now you have a few Real Estate Tax Strategies in your back pocket to deploy. At the very least, you can make good conversation at your next networking event.