Real estate, both residential and commercial, can provide an owner, developer, or designer with many opportunities under current tax law. Here’s how to save money and protect your investment with these top real estate investing tax strategies.
1. Cost Segregation
Our number one real estate investing tax strategy is based on depreciation rules. Cost segregation allows you to treat certain non-structural components of a building or property as having a shorter life than generally allowed.
These rules combined with bonus depreciation offer the opportunity to segregate anywhere from 20 to 80 percent of your acquisition or construction cost. And you get a deduction for that amount today!
Cost segregation studies require a specialist. But the cost is well-worth it more often than not.
2. Opportunity Zones
Opportunity Zones were created under the Tax Cuts and Jobs Act of 2017. This tax strategy allows investors to defer paying taxes on capital gains, dividends, and s-corp distributions by contributing to a proper opportunity zone fund or contribute directly to a property located within a geographical opportunity zone established state by state.
Additionally, you can potentially eliminate taxes on additional gains on that property over ten years.
3. 1031 Exchange
Tried and true, 1031 exchanges allow you to defer paying any capital gains taxes on real estate sold by purchasing another property within six months. Remember, you need to use an intermediary to hold funds and adequately execute the exchange.
4. Energy Efficiency Credits and Deductions
179D deductions allow owners or the designers of new commercial construction or renovation projects to claim up to $1.80 per square foot in extra deductions for meeting specific energy efficiency requirements.
45L credits allow up to $2,000 per unit for residential construction as a tax credit which offsets your tax liability dollar for dollar.
5. Qualified Improvement Property (QIP)
Any improvements on a commercial property made after a building is in service and is not structural can be classified as QIP. Under the current rules, this allows for year one expensing instead of capitalizing those costs and depreciating over a period of time.
This is a common strategy for businesses that hold the real estate they operate the business in. Grouping allows significant deductions to be monetized by offsetting business income with depreciation deductions from the real estate.
Tax Strategies for Real Estate Investing: The Bottom Line
Fortunately, there are tons of opportunities to save on your taxes when you invest in real estate. For a cost segregation analysis, contact Cunningham and Associates today at (508) 797-5003 and see how much you can save.