Real estate investment is a great way to protect and grow your wealth. Real estate is historically safer than the stock market and can has a great return on your investment. There are many options available for real estate investors in Fort Wayne to capitalize on write-offs and other tax haven strategies. Here are some of the top ways to make the most of your investment. Give Reliable Property Group a call at (260) 222-4088 to discuss these methods and see what will work best for you.
Deductions
Write-offs that are the most common for real estate investors in Fort Wayne are tax deductions frequently associated with rental properties. Write-off examples include items like mortgage interest, property tax, operating expenses, depreciation, and repairs. As the property manager, you can write off ordinary and necessary expenses for managing, conserving and maintaining the rental property. These repair and maintenance expenses keep the property in good condition. They do not increase the value of the property. This is why you are able to write them off.
Capital Gains
The length of time that you own the property determines the capital gains tax amount. If you own the property for less than one year, you will have to file that profit with your regular income. By owning the property for more than one year, those profits are taxed at a much lower rate. If your gains are less than your losses, this will offset thousands of dollars of taxable income. Even homeowners can take advantage of the capital gains tax laws and not pay taxes on up to $500,000 of profit!
Depreciation
Another rental property focused write-off is depreciation. This is calculated from three main factors: the basis of the property, or what it’s worth; the recovery period for the property, and the depreciation method used. The Modified Accelerated Cost Recovery System (MACRS) is the most common method of depreciation. The IRS allows real estate investors to deduct depreciation on a piece of residential property for 27.5 years, and 39 years for commercial real estate properties.
1031 Exchange
The 1031 exchange allows real estate investors to trade properties of similar value with little to no tax at the time of exchange. These can roll over gains from one piece of property to another without paying taxes on it until you actually sell the property. Waiting more than a year from the date of exchange is a good idea in order to take advantage of the capital gains tax law. Some criteria for utilizing this exchange, the properties must be of about equal values, must be traded for some sort of real estate asset including Real Estate Investment Trusts (REITs), and must be held for productive purposes in business or trade.
Tax-Deferred Retirement Accounts
Some Health Savings Accounts (HSAs) and Individual Retirement Accounts (IRAs) will allow you to purchase properties with the tax-deferred. This means you can invest in real estate now and pay taxes on it later. There may be annual contribution limits or real estate type restrictions, so make sure to do your research on these accounts before making any decision.
Self-Employment/FICA Tax
As a property manager and real estate investor, you may be able to write off your self-employment tax. You have to make sure your business is structured correctly to utilize this option. Self-employed means you are 100% responsible for paying the Federal Insurance Contributions Act (FICA) tax on your own income. For payroll employees, this tax is split between the employer and the employee.
Opportunity Zones
Have you heard of opportunity zones? These funds are a fairly new concept that was introduced in 2018. It is a tax incentive to have real estate investors contribute capital gains with deferred or no tax on their original investment. You should be aware though, these zones are generally rural and distressed. Because this program is so new, be sure to keep up on the requirements because they could change.