Tax Saving Strategies for Real Estate Investors
Contrary to what many believe, the fact is that tax savings don’t occur in April every year. Planning doesn’t begin until you submit your tax returns to your tax professional. In April, all you have to do is submit what happened (or did not happen) the previous year. To get the most tax savings, you must be proactive in tax planning. This means being proactive throughout the year to put appropriate strategies in place to ensure that, by April of next year, you will be able to save money on taxes.
The best time for planning tax strategies is to look ahead and take the necessary steps to make sure we’re legally employing this tax law to our advantage. It’s true, one of the most ideal times to plan your tax strategy is right at the close of the year. Why? It’s similar to a game of sports in which scores could change throughout the match. The winner is determined by the player with the most points after the game, at the point when the clock has slowed to zero. Tax Savings operates in the same way. The way your numbers are at 12/31 will determine mostly the amount of tax you have to pay or the amount you save.
Simply stated, tax planning for the year’s end involves analyzing your financial position at the close of every calendar year, and figuring out strategies to reduce your tax liabilities for the year. This is particularly important for real estate investors since there are a myriad of tax benefits that we can take advantage of.
Below are the Best year-end tax planning techniques for real property investors
Maintain Accurate Financial Records
A crucial aspect of effective tax planning for the year’s end that real estate professionals can benefit from is in keeping accurate and complete financial documents. Bookkeeping that is organized and thorough goes beyond simply storing numbers; it’s a strategic tool to plan tax strategies.
If you keep a complete document on all transactions in the financial realm, such as expenses, income, as well as property purchases and sales, buyers can be sure that they maximize their deductions and credits. This will not only give you an overview of your financial condition, but also help to prepare for tax savings.
Complete and current financials help discover tax planning opportunities and allow better forecasting of tax obligations.
In a nutshell, good bookkeeping can provide real estate investors with the information needed to strategize and plan their the year’s end. With the many systems and tools available, you must keep your books and records properly set up to be successful. If you don’t have it in place, the end of the year is the perfect moment to get the necessary information in order.
Not only will this assist you in planning your year-end tax strategy, but it could also help reduce stress during tax season in April.
Defer Income into Next Year
Another tax-efficient year-end method for real property investors is to defer earnings into the following year.
This method could involve a delay in the closing of an estate sale until the beginning of January in the following year. If the sale is completed in January, the proceeds of the sale won’t be tax-deductible until the time you submit taxes for the next year, thereby delaying the tax bill. A delay of income by just one day (from 12/31 until 1/1) can lead to all-year-long tax deferral. This allows you to get an additional year to think about ways to offset this income.
Another strategy is to put off collecting rent due until after the New Year. Remember that when it comes to taxation, it’s not how much you earn, but rather the money you keep. Therefore, by carefully deferring your income, you’ll be able to manage your tax burden more efficiently. However, you should be aware of this strategy since it may not be beneficial if you anticipate being in an upper tax bracket in the coming year.
Accelerate Expenses
Another strategy to plan your tax year’s final tax return that real estate property investors can use is to increase expenses. This means making tax-deductible purchases for business before the year’s end to lower your tax-deductible income for the year.
for landlords. These expenses can include repairs and maintenance on rental properties, the prepayment of property taxes or insurance, and the purchase of equipment or other supplies required to manage property.
If you anticipate the need for a repair or major purchase coming up in the next year, think about whether it’s better to complete the purchase this year rather than. In doing this, you’re effectively shifting the tax deductions of next year to this year, thus reducing your tax obligation for the year.
Be aware of the amount you are paying to avoid concerns. For instance, you might not want to pay an enormous amount to a new contractor with whom you’ve never had a relationship. You must ensure that the money you are preparing to pay has the least chance of being lost or forfeited.
Shift Property Management Income to Corporation
Transferring property management income to the Corporation is another strategic option in tax planning for the year’s end for real property investors.
The establishment of the Corporation for managing your properties could reduce your tax burden. C Corporation tax rates are lower than the federal rate. Corporation tax rate is at a fixed 21%, which is less than the highest individual federal tax rate. If your tax rates are more than the 21% threshold, then it could be beneficial to transfer some of your earnings into your C Corporation.
This way, the revenue generated from property management will be assessed at the rate of corporate tax, rather than at your rate. But it’s important to keep in mind that this method has its complexities. The company must be a legitimate, functioning firm that is able to provide genuine services.
Keep in mind the possibility of double taxation. The C Corporation pays corporate income tax, and shareholders pay taxes on dividends. Similar to most aspects of the tax field, there isn’t any one-size-fits-all solution.
Manage Capital Gains and Losses
The proper management of losses and gains is an important aspect of planning a tax-free year-end for real property investors. If you have a substantial gain this year but didn’t do an exchange under the 1031 code, think about making use of offset strategies before the year’s end to lessen the tax burden.
For instance, do you own other rentals which are likely to result in a loss of tax this year? It is possible that tax losses can be planned out in a study of cost segregation. You could also be thinking about purchasing additional rentals before the end of the year to generate some rental losses to offset gains.
Time is of the Essence
You can clearly see that the year-end preparation for tax-free real estate investment is essential. This is the perfect moment to get started. It is essential to begin with this prior to the time that the holiday season begins to kick in. The reason for this is twofold.
The first is that the holiday season is generally a busy time, and you might not have the energy to pay your financials the attention they merit. By beginning early, you will ensure that you have time to review your financial portfolio, talk to your tax advisor, and make the necessary adjustments.
A second reason is that various tax strategies, like delaying income or accelerating expenses, take patience to successfully implement. These aren’t last-minute decisions, but they do require meticulous planning and planning. Begin your tax planning well before the holidays, ensure that you will have ample time to put these strategies into practice, and get the most tax savings.
