As the New Year approaches, many people have started to set new goals and make New Year’s Resolutions, including real estate investors. Many investors have set a goal of ringing in the New Year with increased profits and more money in the bank. One way to make this resolution more than a holiday wish is to develop a tax saving strategy. Fortunately, there are many sections of the tax code that favor real estate investors, thereby increasing overall profits. Let’s take a look at four must-see tax tips for 2022.
1. Deduct your expenses
One of the biggest tax benefits that investors enjoy during the tax year is the expense deduction. As a real estate investor, whether you invest in commercial or residential real estate, you can benefit from a tax deduction for any ordinary and necessary expenses associated with the maintenance of your investment property. Expenses deemed ordinary and necessary include, but are not limited to, the following:
Investors can currently deduct up to $ 10,000 for property taxes paid at the state level and at the local level on their federal income tax. Although this is the current rule, the tax world is anxiously awaiting the entry into force of a proposed tax amendment that will increase the limit of this deduction. The Biden administration has proposed increasing the limit on the National and Local Tax Deduction (SALT) to $ 80,000. This proposed change is expected to be in effect from 2021 to 2030.
Mortgage loan insurance premiums
In addition to property taxes, the tax code also allows real estate investors to deduct insurance premiums paid. According to the IRS, a deduction is allowed for mortgage insurance premiums paid in the year the premium is both paid and accrued.
Property management fees
As mentioned earlier, investors can claim a deduction for any ordinary and necessary expense, which includes property management fees. So, if you have hired a property management company, the costs incurred can be deducted from your tax return.
Building maintenance and repair cost
Not only can you deduct property management costs, but you can also deduct costs incurred to maintain and repair your property. However, if you are thinking about claiming a deduction for a repair or improvement, be sure to consult a tax professional first. A repair can be confused with an improvement, and they have two totally different tax treatments.
A little-known expense that real estate investors can take advantage of is travel costs. You can deduct travel costs related to the collection of rental income, management, conservation or maintenance of the property.
2. Loss impairment
In addition to claiming a tax deduction for expenses, real estate investors can also take advantage of one of the tax nuggets of the world: depreciation. Depreciation allows investors to recover the cost of their tangible asset over its useful life. For residential properties the cost is amortized over 27.5 years and for commercial properties it is amortized over 39 years.
In addition to claiming depreciation of the property, investors can also have a cost segregation analysis performed to claim depreciation. If an investor chooses to use this strategy, depreciation can be claimed on land improvements and internal building contents over a period of five, seven or 15 years.
If you are considering using this strategy, it is highly advisable to work with a tax professional.
3. Defer the taxation of capital gains
In addition to depreciation, one of the other great luxuries of owning investment property is being able to defer the taxation of capital gains. Investors can do this by making a similar exchange under Section 1031, using a Delaware statutory trust, or by making a 721 exchange.
Each type of exchange has specific IRS rules that should be followed closely, so working with a qualified advisor is a must when it comes to deferring capital gains.
4. Practice good record keeping
Finally, when it comes to the world of tax benefits and deductions, accurate record keeping is a must. The IRS generally requires business owners to keep records for four years. So if you take advantage of any of these strategies, make sure you keep good records.