Owning a primary property may seem like enough of an expense, but just as your main home provides you with tax relief and incentives, an investment property can do the same. Explore the options with a tax professional to see how you can save on your annual taxes.
Real estate investing is a great way to make a lot of money. It can also be a way to get hit with a lot of taxes. When investors buy and sell properties, or have rental income, much of this is considered taxable income. It’s important to be smart about your expenses and ensure that you are taking advantage to as many deductions as possible.
That is what real estate tax shelters are for.
You should always consult with a professional, but for a general overview, check out A Beginner’s Guide Real Estate Tax Deductions (Commercial vs. Residential).
Two of the biggest tax deductions are mortgage interest and depreciation. If you own rental property or carry the mortgage on a home that you are flipping for several months, the interest that you pay on these mortgages can be taken off as a tax deduction and may help defray some costs.
Be aware that these laws vary from state to state and are constantly changing at the federal level. It used to be a huge benefit to homeowners, but in recent years, the changes in tax law have made it less lucrative. It still may be worth exploring.
Depreciation is another great way to try to save on your taxes. They use depreciation to account for the wear and tear that a rental property experiences over its lifetime. You can learn how to calculate depreciation on rental property on your own, or you can consult an accountant or CPA.
Although it sounds like a negative word, depreciation works in your benefit. With time, all properties have worn down and need repairs and updates. Use this to your advantage!
Depreciation is calculated most often on "buy and hold" properties, but if at some point you want to sell your investment rental property, you will want to read How To Avoid Taxes When You Sell A Rental Property. The benefits of owning rental property still outweigh the negatives, it’s just important to make smart financial decisions regarding taxes.
Choose Green Home Improvements
In this era of eco-conscious living, there are many tax incentives available for "green" improvements to your home. Just like there are rebates if you drive an electric car, installing energy efficient windows, or buying high-efficiency appliances, can result in tax savings for you at the end of the year. We’ve provided some tips here: Eco-Friendly Planning for Your House.
Get a CPA for your investments.
No matter what type of investment properties you have, you should have a trusted CPA who can help you to navigate the ever-changing tax codes and make sure you are aware of all the deductions you may be eligible for. Using your real estate investments as a tax shelter will make your properties even more lucrative!