Investing in real estate is a legitimate way to build your wealth. It is one of the few commodities that will increase in value over time, especially if you take care of your properties. However, taxes can be a bit heavy on your budget and take a big chunk out of your potential earnings.
Fortunately, there are ways around paying too much tax. Here are a few opportunities you can use to get the most benefits from your investments:
The 1031 Exchange
One of the more notable loopholes is the 1031 land exchange. Technically, you aren’t eliminating your tax. You’re just delaying the payment of it. However, having the money that you could have paid for capital gains actually work for you before it gets taxed away is a big bonus.
1031 exchanges work by allowing you to sell off property and use the money gained from that to buy an equivalent property within six months. It allows you to defer paying the capital gains tax that you would have had to pay if your real estate gained value since it was initially purchased. It also allows you to shift properties around so that you can be earning better.
The 721 Exchange
The more obscure brother of the 1031 exchange, the basics of the 721 exchange are the same: You defer the capital gains tax on a property you’re selling and use the funds to invest in something else. This is where it is different. Instead of investing in the same type of property, you can use the money to invest in multiple real estate funds.
This is a big difference mainly because it allows you to diversify your investments more. And unlike 1031, you don’t have to depend on a property being available. Just invest in a fund, which will potentially give you access and ownership to a lot more real estate.
The Active Participant Loophole
Real estate right losses that come from depreciation are damaging to your portfolio and can be used as a tax deduction. However, they usually can’t be used to protect the income you earn from other sources. There is an exception, though. If you claim to be an active participant in real estate investment, you can claim up to $25,000 in deductions. This only works if your annual income is less than $150,000.
The De Minimis Safe Harbor
Another tax loophole you can use is if you are actively maintaining properties. The de minimis loophole allows you to use an item for tax deductions if you spend less than $500 or less. This can be stacked, too. For example, a landlord could buy several $500 appliances for their property and just write them all off in tax time.
There is also a loophole if you are getting rid of pieces of a property you own. For example, when you do a repair and it replaces a piece of your property, you can write off its cost. An example of this would be you replacing the roof of your property. You can deduct the cost of the old roof during tax time.
Real estate investment is a major earner. Ensure that you are maximizing your returns from your investment by using the above loopholes to reduce your tax burden and have more money in your pocket or savings account.