It’s about that time. Each year, right around now, most real estate investors realize that they need to organize their taxes for the upcoming year. Whether you do them yourself or get an accountant to help, investing in real estate makes it a more cumbersome process. Gone are the days of a quick 10 min TurboTax session to get the taxes done.
That being said….. there are some MAJOR tax advantages to real estate investing that many investors are well aware of. With the help of our accountants at Hostetter and Hostetter, we came up with the top suggestions for tax time for real estate investors (NOTE: SlateHouse Group is not a CPA, these are just suggestions we have learned over the years…. we highly recommend consulting with an accountant for your own personal taxes).
1- Stay Organized via the Cloud. Technology like Google Drive or Dropbox. At SlateHouse Group Investments, we have moved all of our documents and information onto Google Drive. This means no hard copies that are bound to get lost in the madness. It also makes it incredibly easy to share with your business partner or accountant as you can create each sharing rights in the folder.
2- Learn to utilize the 1031 Exchange. This one of the lesser known tax laws that allows an investor to defer capital gains tax on a purchase by moving the profits of one purchase to another new purchase. In the world of flipping….. this can be a HUGE deal and save you thousands of dollars in taxes.
3-Make sure to write-off the depreciating value of the property. If you have rental properties, this is really one of the biggest wins on the tax side. Take the value of the house, divide by 27.5, and this amount can be written off your taxes each year for depreciation of the asset.
4-Don’t forget to also write off interest(and property taxes, deed prep cost, etc.). With interest rates so low, we have utilized banks to refinance or take out loans on many of our properties. The interest paid each year on the loan is deducted from the taxes paid…. another really nice advantage of owning rental units.
5-Get a good CPA to help! Prior to hiring an accountant, we were always nervous that it’d cost a ton of $$. We were pleasantly surprised that if you are organized (see point #1), an accountant is well worth the price paid. Not only does it save you hours, but it can also decrease the chance of getting audited which will take up even more of your time.
6-Refinances are tax free. Let that sink in for a second. Tax free. It almost sounds made-up….. but it’s true. Let’s play out a real-life example. You buy a run-down property for $10K in cash. You put $40K into the property, and now have $50K invested. You get it appraised for $100K, and refinance it to pull out $80K (at a typical 80% loan to appraisal value). You have just “made” $30K, but don’t have to pay any tax on that amount. NICE!!!! Editor’s note -- we do this about twice a year at SHG Investments.
7- Driving mileage for investment purposes is also tax deductible. If you don't have a property manager, this will be a pretty significant amount of miles! Checking out the house after a storm, driving to court, or just stopping by the house to pick up the rent check.....these all count towards mileage at $0.57 cents per mile.
8- Understand the difference between a repair and an improvement. In general, an improvement must be capitalized and written off over a period of years while the cost for a repair call be fully deducted in the year the expense occurred. There are defined lists by the IRS of what items are considered repairs vs improvements.
There are tons of other tax saving strategies. This list is certainly not comprehensive but a good starting point. April 18th is approaching soon. Happy filing!