Planning ahead for your 2020 taxes can make life easier and less expensive. This post offers tax planning information for investment real estate in Omaha. These tips will help you prepare to talk to your CPA, financial planner, or lawyer before making any financial decisions.
Every investor starts with the basics. Find a great property, manage it well, mind your cash flow and expenses, and deal with challenging situations. Before long, tax planning becomes a critical part of every great investor’s strategy. There are many strategies to keep more of your earnings in your pocket. The first step is to remember that your investments are a business and carefully planning a tax strategy is an important part of every business. Planning ahead now may allow you to lower your tax bill and watch your money grow in other real estate ventures. A great tax plan is key to reaching your goals.
Deduct Appropriate Expenses
Many an investor has been frustrated to learn of deductions they never realized were legitimate. As a landlord or investment property owner, there are a number of deductions you are able to take as legitimate business expenses. You are probably aware of deductions for property management expenses, insurance, operating expenses, repairs, and contractor fees. Some deductions are dependent on your legal entity (company or sole proprietor) and if you are working full time in real estate. You may be able to deduct your interest expenses, home office, business travel, car rentals, relevant education, memberships, and more. Make sure you are keeping separate bank account for your investments vs. your personal accounts. You will need to be able to track all of your business-related expenses correctly. It’s wise to discuss all of your financials with your CPA to identify expenses you didn’t realize were deductible.
Options for Planning Your Depreciation
Depreciation schedules used to be prescriptive and rarely reflective of reality. Today, there are more options available from the 2017 Tax Reform Bill. Long depreciation terms and complicated schedules have been replaced with greater ability to expense appliances, furniture, or other assets for your business. In many cases, you can write off 100% of the expense immediately. This is perfect for those about to renovate or redo the interior or exterior of a house. If you have some big projects ahead of you, your depreciation expenses can add up to thousands. One caveat, there are times when its beneficial to spread out the expense (especially if your income is increasing) and times you’ll benefit from an immediate deduction (money is always worth more now than in the future). Check with your CPA to develop the plan that works best for your business strategy.
Plan For Future Tax Changes
While your current tax situation may seem fairly stable, your situation will likely be different in retirement. More importantly, there are many tax-advantaged programs offered by the government to encourage savings. Planning ahead for your retirement will allow you to reduce your overall tax bill. You may be able to contribute thousands to tax-deferred real estate assets. Deferring this income year after year will help you to build your 401k, giving you at least one stream of income for your retirement. Other options include things like a simplified employee pension that allow people to contribute up to $56,000 in 2019. You can also use your existing retirement funds to invest in real estate through plans like a self-directed-IRA.
The new tax laws have been good for investors. Among its features are a 20% tax-free pass-through deduction, lowering the overall tax burden. This deduction is available based on “qualified business income”, which can include owners of short-term rental properties as long as they are seen as a business by the IRS and not a hobby. This is great news for people who using Air BnB or VRBO to rent out their properties.
The time may come when you want to exchange your property for a different one. Some investors will sell when their depreciation deduction wears out and thus the property is less profitable. Others seek to exchange into larger properties, like exchanging single-family homes for multi-family units. A 1031 exchange allows you to defer the depreciation recapture and capital gains tax as long as you reinvest the profits into like-kind property. This is the perfect strategy when you plan on reinvesting your proceeds into other real estate ventures. The term “like-kind” can refer to a wide array of real estate investment choices. The term refers to the character of the asset, not the quality. Any property, whether residential, multi-family, or commercial would apply.
It’s important that you pay yourself a reasonable salary, especially as an investor. Many business entities are required to pay a salary. Too low of a salary can lead to audits, penalties, and interest. But, a high salary may result in paying extra taxes. Finding the balance is key. This will help to keep you accountable and help you from comingling expenses out of necessity. Co-mingling personal and business accounts can increase your liability should someone seek litigation against you for any reason.
Of course you don’t want to see any loss from your real estate investments, however, it will happen on occasion. The good news is that these losses can be deducted from your overall tax liability. That said, there is a $3,000 limitation on how much you are able to claim.
There is obviously much more to tax planning for investment real estate in Omaha than this post covers. The information here should inform your conversation with your CPA. A great tax accountant will save you much more than the cost of their service. Tax laws are always changing and by working with a professional, you’ll be sure you aren’t losing money or at a place where you need to alter your strategy. Your specific tax plan will vary based on how your company is structured and the types of investments you are making.