Tax time is here and while many people dread this time of year, it isn’t that bad if you are prepared and have the right people. Real Estate investors have opportunities to write off expenses that lower their tax liability. Before you file your taxes, here are some top tax tips every Real Estate investor should know.
Know the Difference Between Short and Long Term Investments
The IRS differentiates between short and long term investments which means they tax these differently. For example, long term investment capital gains taxes are usually lower than short term investment capital gains. This is something to keep in mind as you expand your portfolio.
Short term investments are ones you’ve held for less than a year (typically fix and flips). Long term ones are properties you hold for over a year (typically rental properties).
Track Your Qualified Expenses
You are considered a business owner which means you can write off a lot of your business expenses. The bad news is you do have to track your expenses to write them off. Think of these as marketing fees such as insurance, business travel, mortgage interest, professional services, etc.
Keep a record of these throughout the year in a log book or an Excel spreadsheet to make your job (and your tax preparer’s job) a lot easier when you file. Your CPA will be able to determine which expenses are eligible as a deduction.
Don’t Assume All Repairs Are Fully Tax Deductible
Not all improvements can be a write off! For example, if a repair is a capital improvement, it becomes a depreciating expense. This means you may need to take a prorated amount of the deduction each year. There is a very fine line between a repair and a capital improvement. KEEP RECORDS so that your CPA can best help you when filing.
Reinvest Your Capital Gains to Lower Your Tax Liability
If you buy and sell properties you should know that you’ll pay taxes on the capital gains. What you might not realize is there is a loophole.
If you reinvest your money into another property, it is considered a like-kind exchange. Talk to your CPA and work closely with him or her to do this so that you do it correctly.
Hire A Qualified CPA
Taxes are complicated and you don’t want to make a mistake and get caught. Hiring a qualified CPA will ensure you get all your deductions you can and do it properly. A CPA should be able to help prevent you from an IRS Audit!
Take Advantage of Your Tax Breaks
By utilizing the tips above whether you are a new or seasoned investor, tax time might not be so bad for you. These are just a few tips, and while they are not valid for everyone, there could be more a CPA will be able to find for you.
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