There’s no doubt that buying & managing Investment Properties comes with a lot of responsibilities, including making sound financial decisions. So how do you keep costs low & profit margins high? In this article, we cover 5 Tax Saving Strategies to help you reduce your bills come tax season.
Keep Track of Property Expenses
Keep track of everything. The cost of purchasing the property, costs involved in renting it out: insurance, repairs, bills. Knowing and inputting your expenses allows you to lower your tax bill when you sell the property for a profit.
A 1031 Real Estate Exchange
A 1031 exchange is simply when you use the profits of the sale of one property to buy a ‘like-property’ (an investment property for an investment property. By doing this, you are able to avoid having to pay the tax bill. As well as if you are looking to downsize, you are able to use a 1031 exchange to move money from one property to another.
Real Estate Investment Trust (REIT)
By acting like a mutual fund, a REIT is considered the best way to invest in a property without having to buy the property yourself. One downside that you may find this method however is there is a required distribution of 90% of taxable income. While this may lead to a higher return that you will owe taxes. There is the possible bonus that “these distributions can help lower your tax bill by offsetting the income you make on other investments” (Paisa Bank).
Consider Refinancing Your Property
While refinancing will not get rid of taxes altogether, it can aid in the deferment of paying taxes. If you are looking to hang on to your property after you refinance, the tax rate may decrease which will also result in you paying less on taxes.
Offset Tax Gains & Losses
Investors are taxed on capital gain the amount you gain minus any investment losses. Keeping track of your expenses can help you identify any losses that will in turn offset your gains reducing your tax bill.
If there are any years that your losses are greater than your gains, “you can use up to $3,000 of net losses a year to offset ordinary income on your federal income taxes”.
Contact Us for Investment Property Tax Guidance*
Taxes are one of the most important financial aspects of buying & selling Investment Properties. If you’re managing Rental Properties over a period of time, you may want to consider refinancing as the property value increases could allow for additional investments. When you sell or refinance an Investment Property, you’ll need to keep in mind any Capital Gains you make & how you can roll those over into new investments tax-free. Call us today with any Investment Property questions you have!
Schedule an Analysis with Grimm Realty Group to discuss your Investment Property Tax Strategy today!
*Grimm Realty Group is not a licensed Tax expert but will be able to direct you in the right direction regarding Investment Properties.
Top 5 Tax Saving Strategies for Investors Sources:
Paisa Bank: 5 Tax Saving Strategies for Real Estate Investors
Kay Properties & Investments LLC: Replace Debt in a 1031 Exchange
Vanguard: 6 Tax Saving Strategies for Smart Investors
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