Investing in real estate can be complicated. Owning both commercial and residential property can provide property owners, developers, or designers with a myriad of profitable opportunities and tax advantages under the current tax laws.
Are you reaping the many tax benefits of real estate investing? These little-known property tax strategies can help you save money and protect your investments.
What are Some Tax Benefits of Real Estate Investing?
1. Cost Segregation and Depreciation
A cost segregation study could help save you thousands of dollars. This tax-saving strategy allows property owners to allocate all property-related costs into the appropriate property classes.
This helps shorten the depreciation recovery period and can be applied to commercial structures that have been recently built, bought, remodeled, or upgraded.
Cost segregation allows you to treat certain nonstructural components of a building or investment property on a shorter depreciation schedule. It involves splitting up the basis of rental properties into separate components.
This means that items such as refrigerators, washers, furniture, and other nonattached properties can benefit from a depreciation deduction. When combined with bonus depreciation, cost segregation allows property to segregate anywhere from 20 to 80 percent of its acquisition or construction cost. Even though a cost segregation study requires a specialist, it can still benefit businesses by saving them thousands of dollars.
2. Opportunity Zones Tax Incentives
Another tax benefit of real estate investing, opportunity zones were created under the Tax Cuts and Jobs Act of 2017. This tax strategy allows real estate investors to defer paying real estate taxes on capital gains taxes, dividends, rental income, and S-corp distributions.
Investors can contribute to an opportunity zone fund or contribute directly to a property located within a geographical opportunity zone established in their state.
Additionally, property owners can potentially qualify to not pay taxes on additional gains on a specific property over ten years.
3. 1031 Exchange Benefits
A tried and true strategy for real estate investment, 1031 exchanges allow property owners to defer paying any capital gains taxes on sold real estate if they purchase another property within six months.
Remember, it’s important to use a qualified intermediary to hold funds and adequately execute the exchange.
4. Energy Efficiency Credits and Tax Incentives
A 179D deduction allows property owners or the designers of new commercial construction or renovation project to claim up to $1.80 per square foot in extra deductions, as long as the project meets specific energy efficiency requirements.
45L credits allow up to $5,000 per unit for residential construction as a tax credit which offsets your tax liability dollar for dollar. New 45L provisions now include two credit tiers.
According to the Department of Energy, “The Inflation Reduction Act of 2022 (IRA) ... provides taxpayers with a tax credit for eligible new or substantially reconstructed homes that meet applicable ENERGY STAR home program or DOE Zero Energy Ready Home (ZERH) program requirements.”
The new 45L provisions include two tiers of credits, allowing up to $5,000 for single-family and manufactured residences that are eligible for the EPA's ENERGY STAR Residential New Construction Program or ENERGY STAR Manufactured New Homes Program.
Read More: Top 7 Small Business Tax Tips
5. Qualified Improvement Property (QIP)
Any nonstructural improvements on a commercial property that are made after a building is in service can be classified as QIP. Under the current rules, this allows for first-year expensing, instead of capitalizing those costs and depreciating over a period of time.
6. Grouping Deductions on Property Taxes and Rental Income
This is a common strategy for businesses that own the real estate used to operate their business. Grouping allows significant deductions to be monetized by offsetting business income with depreciation deductions earned from the real estate.
In addition to grouping as a tax deduction strategy, you can also deduct specific expenses such as rental property tax, mortgage interest, property insurance, and property management fees.
Tax Strategies for Real Estate Investments: The Bottom Line
Fortunately, there are many tax-saving benefits of real estate investing. For an in-depth and thorough cost segregation analysis that could potentially save you thousands of dollars, contact Cunningham and Associates today at 508-687-6329 and see how much you can save.