Now that we're in Q4, it's a great time for high-earners to remember that they have a limited window to strategize and implement a tax plan that can make a real impact.
Real estate investment is often praised for its simplicity, ability to generate cash flow, and potential for future appreciation.
However, what many people overlook or are unaware of are the amazing tax benefits that come with it. We often hear individuals say, "I don't think I qualify" or "Isn't real estate investing a full-time job?" The truth is, you can take advantage of these benefits as long as you're an informed taxpayer.
How can you benefit?
1. Business Entity Optimization
Many investors find themselves in a bit of a predicament. On one hand, they have substantial earnings from their business, which is classified as ordinary income. On the other hand, they also have real estate investments, which are considered passive income (or loss sources).
The good news is, there is a way to break free from this trap. By unlocking the potential of these passive losses, investors can offset their ordinary income and significantly reduce their overall tax burden. This can make a significant impact on their financial situation and provide them with more flexibility and opportunities for growth.
2. Understanding Short-Term Rental Rules
Short-term rental real estate, like Airbnb or Vrbo, is gaining popularity among investors due to the enticing cash returns showcased in numerous social media posts. While these returns may be real, investors can also significantly benefit by familiarizing themselves with the tax code and making well-informed choices.
Interestingly, short-term rentals can qualify as active gains or losses. Consequently, this can yield similar outcomes as mentioned earlier – unlocking the "trapped" paper losses resulting from depreciation and enabling the offsetting of other ordinary income.
How can I do this?
There are certainly some intricacies to consider with each of the strategies mentioned and there are many additional ways real estate investing can improve your tax situation. At C&A, we are committed to ensuring that you make well-informed decisions and that you have a thorough understanding of your optimal tax strategy. If you would like to discuss your unique situation in more detail, please connect with us.