Investing in real estate has its ups and downs. Real estate, both commercial and residential property, can provide an owner, developer, or designer with many opportunities and tax advantages under current tax law. Here’s how to save money and protect your investment property with these 6 tax benefits of real estate investing a prudent real estate investor can take advantage of:
1. Tax Advantage of Cost Segregation & Depreciation
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 buildings or investment properties as having a shorter life than generally allowed. It involves splitting up the basis of rental properties into separate components. This means things such as refrigerators, washers, furniture and other non-attached property can benefit from depreciation deduction.
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 Tax Incentives For Investment Property
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 tax, dividends, rental income 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 qualify not to pay taxes on additional gains on that property over ten years.
3. 1031 Exchange Benefits on New Investment Properties
Tried and true strategy for real estate investment. 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 Tax Incentives
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.
6. Grouping Deductions on Property Taxes & Rental Income
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.
In addition to grouping as a 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 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) 687-6329 and see how much you can save.