There are several key tax strategies for investment property owners that can help save money on taxes.
You can use tax strategies to defer tax payments or reduce the amount you owe. However, there are different rules for different strategies you must remember. Here are tax strategies for investment property owners.
4 Tax Strategies for Investment Property Owners
Multiple tax strategies are available to help you as a landlord or real estate investor. These strategies will help you defer taxes or reduce taxes you may owe.
1. Take Advantage of Depreciation
The first tax strategy for investment property owners is to take advantage of depreciation. As a landlord or real estate investor, depreciation allows you to spread out property costs, and you can then match depreciation expenses with revenue during the same period.
The IRS has four requirements for investment property owners seeking to make their property depreciable:
- The property has a determinable useful life, meaning it becomes obsolete, decays, gets used up, loses value from natural causes, or wears out.
- The property should last for more than one year.
- You own the property.
- You use the property as an income-producing activity or for your business.
Landlords and real estate investors can begin taking depreciation as a deduction after placing the property in service or when you can use it as a rental.
There are also several protocols for landlords and real estate investors to end depreciation. The IRS imposes a time limit of 27.5 years for a residential rental property’s useful life.
If you use depreciation on your property, you can depreciate it until it meets one of two conditions: 1) If you deduct your entire cost or basis in the property, or 2) If you retire the property from service.
If you want to calculate depreciation, you’ll follow four steps:
- Determine the basis of your property.
- Separate the cost of buildings and land.
- Determine your basis in the house.
- Determine the adjusted basis if it’s necessary.
2. Leverage and Maximize Deductions
Another tax strategy you can implement involves tax deductions. You can leverage deductions to reduce income tax on your property’s profits.
As a real estate investor, you may qualify for deductions depending on your participation in rental property. The IRS classifies real estate participation arranged in three categories:
- Material participation
- Active participation
- Passive activity
You can qualify for several deductions related to your investment property and work related to maintaining your investment property. Some common investment property deductions include:
- Home office expenses
- Maintenance and repairs
- Office space
- Professional services
- Property taxes
- Travel expenses
3. Defer Taxes with a 1031 Exchange
The third way to implement tax strategies for investment property owners involves a 1031 exchange.
A 1031 exchange allows you to swap one investment property for another investment property, but the properties must be of like kind. This swap will enable you to change your investment without cashing out its profits or without having a capital gain. The IRS has no limit on how often you can do a 1031 exchange.
There are different rules for a 1031 exchange regarding your property purchase and property sale. There are three timeline rules which may impact how you qualify for a 1031 exchange:
- Following your property’s sale, cash must go to your intermediary. The intermediary will hold your cash after selling your property and use it to buy your replacement property. You can’t receive cash, or else you won’t qualify for a 1031 exchange.
- Within 45 days of your property sale, there’s a property requirement. You’ll designate the replacement property in writing to your intermediary, which will specify the property you’ll want to acquire.
- Within 180 days of your property sale, you must close on the new property.
4. Increase Your Property’s Tax Basis
The third tax strategy for investment property owners is to increase your property’s tax basis. The purchase price is your cost basis when you purchase a property using cash or other property. The cost basis can include additional costs, such as:
- Excise taxes
- Installation and testing
- Real estate taxes
- Recording fees
To increase your property’s tax basis, you’ll increase the property basis using items added to a capital account. You’ll include improvement costs that you expect to have a useful life for over one year.
A second expense that will increase your property’s tax basis is rehabilitation expenses. These expenses will occur as you make improvements to your property, but there are two steps to track these expenses to determine any credits.
First, you’ll subtract rehabilitation credits for these expenses before you add them to your basis. Next, you’ll increase your basis by that amount if you have to recapture any credit.
Other expenses which increase your property’s tax basis include:
- Cost of extending utility service lines to your property
- Impact fees
- Zoning costs
Reduce Your Investment Property Tax Burden with a CPA
Owning investment properties comprises various duties. Keeping deadlines, protocols, and rules in place while also working on your own properties can become stressful, and if it’s stressful, consider working with a CPA.
When you want to reduce your investment property tax burdens, work with certified public accountants who can help you. Work with a CPA at 1-800Accountant so that you can receive tax strategies as an investment property owner.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.