Investing in real estate will provide you with a number of tax benefits and bonuses that allow you to legally lower your taxes. While that sounds really wonderful, the question is: How does it work?
You will find the answer in this article. Here is how investing in real estate can help you generate income and reduce your taxes.
What You Should Do For An Income Increase and Tax Reduction
If you haven’t yet taken the transition to become a real estate investor, there are ways to produce income while lowering your tax liability. You will gain new leverage and appreciation for what your resources can do for you by buying, renting, and later sell properties, especially in terms of assisting you in keeping more of what you receive.
It all started when the Qualified Business Income Deduction (QBI), also known as Section 199A of the Internal Revenue Code, was put into action. This tax law allows you to subtract twenty percent of your rental income from your taxes right away.
So, no matter how much money you make, you will always get a twenty percent bonus. Going back to the topic, below, you will know some of the benefits of being a real estate investor.
1. You Can Earn Some Increase By Flipping Or Holding Your Properties
If you are flipping your properties, the best way is to consider renting them out for a year before selling. You lower your tax rate, generate some cash flow, and you can even benefit from the increased value and a higher selling price.
However, if you sell them before a year counts, chances are the profit you get will be taxed as well. Also, the IRS may think and classify you into someone self-employed. Now, that will ruin it.
To stop this, you can keep your assets for at least a year before selling them. Or you can consider holding them for longer. This eliminates the possibility of being labeled a dealer, and the earnings are treated as capital gains rather than ordinary income.
2. Avoid Paying The Additional Taxes- Double FICA Taxes
This is the troublesome matter that will happen if you are considered as someone self-employed already. If you do not know, FICA taxes are used to fund SSS and Medicare. So, by this point, you should be forming your own strategy to avoid being classified as someone self-employed to maximize your benefits.
A sample thing you can do is to demonstrate an investment intent, in which you build and generate capital for other starting investment projects.
Though, there are other investment ventures that may involve making a down payment on a long-term rental investment property. Or you can also consider paying for renovations to another property.
Remember that there are many other ways that you can avoid paying additional taxes. However, you need to file and compile all your receipts to make sure you do it right.
Calculating your own taxes may be something that you need to do, but you have the option to leave it in the hands of an expert. The people behind Mi Tax CPA suggest leaving your tax filing problems to the professionals which will do the job properly and efficiently. All of your concerns will be taken into account so you do not have to worry about anything else.
3. You Can Switch Your Homes Every Time
You can switch your homes and reduce costs for at least two years. You can simply purchase and move into the house as your primary residence. While this may be something that kind of sounds tiring, it is an innovative way to avoid your taxes. You can move into your new property, make improvisations and upgrades, and have a tax-free life for at least two years.
This is a significant sum in tax reduction costs; for singles, the first $250,000 in capital gains is tax-free while the cap for married couples is a whopping $500,000. Sounds good, right?
4. Avoid Taxes On Cash-out Refinancing
When you refinance, you get a new loan with better terms than the previous one. When you get a loan for more than your debt value, it’s called a cash-out refinancing. These assets are yours to do with as you want, and they are not taxed.
These make other money-making strategies possible like BRRRR (which means buy, rehab, rent, refinance, repeat) and BURL (which means buy utility rent luxury).
In BIRR, you buy a home, rehab it, get it for rent, refinance it, and then repeat the cycle with the funds from your cash-out refinance including the money that you had saved. In BURL, the concept is that you buy utility because it has a low cap rate, and then rent luxury because it has a high cap rate.
The exciting thing in this part is the luxury property can appreciate in value over time, making the risk worthwhile.
5. Do Well With 1031 Exchange
Section 1031 of the tax code states it allows property owners to delay paying taxes indefinitely by purchasing a similar property with the proceeds. This means that A 1031 exchange allows a real estate owner to postpone paying taxes on the sale of a home.
Alternatively, you might put it into another property and avoid paying taxes on it for the time being. If you sell the home, you will have to decide whether you want to pay taxes on the proceeds or do another 1031 swap. There’s no rule that says you have to sell; you may keep it indefinitely and profit from the extra rental income.
6. Mortgage Interest Deduction
On their tax returns, real estate investors can subtract the portion of their mortgages that is attributed to interest payments. Usually, these payments are higher at the beginning of the mortgage and steadily lower as the loan is paid off. On the first $750,000 worth for married couples, you can choose to deduct taxes from there.
While this may take a lot of research and practical efforts before you can put a lot of combinations into action, it is well worth it. It would be a great boost to your income, and even better, reduce your tax costs.
To know which of these choices is best for you will depend on your personal circumstances, but all of them will help you get the most out of your real estate investment. So, in the meantime, the only thing you can do is be smart and learn how these things work. Good luck!