Most people believe that investing in real estate is a quick and easy way to improve cash flow. Although returns from real estate are a definite possibility, you need to understand the basic tax strategies for real estate agents if you want to avoid unnecessary taxes.
Did you know that deductions are still one of the best tax benefits in the real estate business? These tax write-offs are applicable for rental properties as well. The costs incurred by property tax, business operating expenses, depreciation, and repairs are eligible for tax write-offs. While it makes sense to read the tips provided by the IRS, wTax Strategies for Real Estate Agentsat you need is tips from tax experts.
Here are five tax tips for real estate businesspersons:
Being Well Organized
The key to getting back the tax money rightfully yours this season is to be organized. Suppose your business is booming and you’re making a lot of profits, the IRS will want to inspect your books; and ask for all receipts and other documents related to your business.
Buying, selling, or refinancing any property last year calls for the escrow company to send you a HUD1 settlement statement. This statement is the final closing one itemizing all charges levied on the seller and borrower. This document has to be included in this year’s tax documents.
Hold Properties for One year or More
Although your business instinct dictates that you should sell when you can make a profit, one of the best tax strategies for real estate agents is to hold the property for a year or more. With investment profit considered capital gains by the IRS, taxing is purely based on the income accrued and how long you own the property.
If you sell before the 12 months, you are liable to pay income tax at 35%. Whereas, when you hold it for more than a year, you pay only capital gains tax at around 15%. Hence, you save a substantial amount in tax by keeping the property for more than a year.
Understand Business Taxes
Suppose you get a lucky break, and there’s a string of property transactions. The IRS’s lens focuses on you, and it won’t consider that as an investment strategy. The IRS will more likely consider it business transactions.
When more than half your earnings are from real estate, they are not taxable under ‘capital gains’ but a regular source of income. Such a classification automatically puts you in a higher tax bracket. And to make things worse, you should pay an additional 15.3% as you are self-employed.
Use Depreciation to your Benefit
Depreciation expense on residential property is deductible as per IRS guidelines under the accelerated cost recovery system. Hence, whatever money you spend on property improvements or renovations, including roof replacement and finishing the basement, can be deducted. The formula for computing it is simple: divide the cost by 27.5 years, and deduct the result from your taxable income for the year.
Before you use any of these tax-saving tips, you need to differentiate between your short and long-term investments. Any property held for less than a year is considered short-term, and the rest are classified long-term.
Hire a Team of Professionals
While following the above tips can be beneficial, the best advice is probably hiring a team of professionals, letting you focus on your core competencies. CPAs know how to help you get back the money you deserve from the IRS. Come tax time. It is better to leave it to trained professionals who have enough knowledge and experience in the tax domain. The fees you pay your tax consultant are negligible when compared to your savings on taxes.
Summing it Up
Despite all the tips you get on saving on taxes, it makes better sense to hire a professional to handle the IRS on your behalf. The trick lies in avoiding tax and not in evading it.