6 Real Estate Tax Tips for Investors
It’s no secret that real estate can be a lucrative investment. Whether you are looking to fix and flip for a quick profit or you build your long-term wealth through active and passive income properties like rentals, you can accomplish a lot through strategic real estate investing. Most investors within the PropertyLark home buying network do this for a living—and they do quite well with their skills and our advanced property-identifying resources.
Having a smart tax strategy will go a long way toward becoming a successful real estate investor. Real estate taxes can be complicated, from capital gains on sales and rental income to general property taxes on every piece of real estate that you own.
Here are some real estate tax tips:
1. Hire a CPA or Financial Advisor
It never hurts to have an unbiased expert on your side to help you make good decisions and build an effective real estate tax plan. Whether you consult with your CPA, financial advisor or both on your real estate investment portfolio, you can make the most of your tax benefits while minimizing your tax liabilities.
2. Reinvest Your Earnings
Unless you are content with just one or two properties, the goal of most real estate investors is to grow their portfolio with as much as they can handle. There is a point, however, where you can only take on so much of the grunt work. This is where you want to build partnerships or hire service providers like property management companies to handle certain day-to-day activities while you focus on big picture planning. You may consider reinvesting your earnings into passive income properties that don’t require as much involvement on your behalf and are treated differently by the IRS than your active income properties. Reinvesting your earnings into additional properties is also a great way to minimize your capital gains tax liabilities.
3. Invest in Real Estate Through an IRA
Self-directed IRAs can give you a lot of different investment options, sometimes including real estate. Some of these IRA investments can be tax free or allow for tax-deferred growth. The only downside is your earnings stay in the IRA and you will have limited access to the funds until you are eligible. If investing in real estate is a key part of your retirement plan, then tying it into your IRA is an effective method.
4. Understand Your Short-Term and Long-Term Investment Plans
Some real estate investors are after short-term investments like a quick fix and flip. Meanwhile, others want to buy and hold properties for long-term gains through appreciation and passive or active income earnings. Then, there are those of us who will do a little of both. Make sure you go into any real estate investment with a plan of what you intend to do with the property and manage your overall real estate portfolio with a proper plan for both the short-term and long-term objectives.
5. Track Everything Carefully
The best way to avoid tax problems is to be organized and track everything very carefully. This includes every single repair or upgrade expense, all income, expenditures, etc. When it comes time to do your taxes, you want to deduct every expense you can and have the documentation to back it up. If your records are a mess, tax season will be a nightmare for you! There are now so many great digital bookkeeping programs and accounting apps that make tracking your expenses and profits super easy.
6. Don’t Forget Eco-Friendly Upgrades
Many real estate investors often overlook the tax benefits of making eco-friendly upgrades to the houses they buy. Just buying the cheapest building materials and equipment isn’t always the best in the long run. You may look at green, energy-efficient options that could give you worthwhile tax deductions and rebates.
When investing in real estate—especially if it’s your primary source of income—it’s important to do your research, talk with financial experts and make wise decisions. This is especially true when it comes to your tax planning.
We hope you find this article helpful. If you are a real estate investor looking to maximize your returns, consider applying to join the PropertyLark network. We bring exclusive off-market deals to you that have already been identified as excellent investment opportunities. To apply, just fill out the contact form on any buyer page of our website!