Advanced Tax Strategies for Real Estate Investors

They say that there are two certainties in life, death and taxes. Despite massive technological advancements in recent years, these two remain, no matter how hard we try to overcome them. While immortality is still unachievable, taxes can be minimized and mitigated through various tools and methods. Using certain tips and tricks can legally ease up your tax bill substantially.

Real estate investments are considered one of the best assets to continually grow wealth and minimize taxation. Not only do real estate investments provide some of the best returns in the market, it can in some cases shield investors from certain taxes.

That being said, be sure to consult with a qualified CPA before taking any action. That way you’ll be able to make sure that your actions are permitted and recommended in your jurisdiction.

Forming an LLC

Both American and foreign investors can form an LLC (limited liability company) and purchase property via the LLC. One of the key benefits of forming an LLC is the fact that it creates a separate legal entity from its owners. This limits personal liability from the owner and helps them legally differentiate between their investment and personal property. Should any lawsuit or debt arise as a result of the property, the owner is not personally liable.

So if a real estate investor with an LLC fails to make payments or a tenant files a lawsuit, only the company can be considered liable, not the investor personally. On the other hand, if the LLC is sued, the funds invested into the LLC may be at risk.

There are a few different types of LLCs, including a sole owner, partnership, C corporation and S corporation. 

Taxes Benefits and LLC’s

Another major perk to forming an LLC for real estate investors is taxation. By forming an LLC the investor reports the income and loss on their personal tax returns. 

Additionally in the world of real estate, each property can be owned by a different LLC with the same owner. This would shield an investor that owns multiple investment properties from cross liabilities. 

For international investors an LLC is an amazing option as there are no citizenship restrictions. This means no matter where you are based, you can purchase an investment property in the USA via an LLC. Flexible membership is another perk as shareholders in an LLC can be an individual, partnership, organization, or even another business entity. 

Refinancing & Property Appreciation

If you have bought a property in a “hot” real estate location it’s dollar value will likely appreciate nicely over time. Some investors may choose to sell a property after it reaches a certain appreciation but this will require them to pay capital gains tax. 

Low interest rates may make refinancing a much more attractive option for real estate investors. By doing so, capital gains taxes are essentially avoided, and the investor can keep the property. As time passes, the loan will likely be covered by the tenets and as rent increases, the monthly payments remain the same. 

After the refinancing is covered by the tenets, this process can be repeated by the investor.

Report and Maximize Tax Deductibles

With investments, reporting and maximizing your deductions is important. This can include both real expenses and paper expenses. Most if not all of the deductions do not require that you itemize and list them all except in case of an IRS audit. You can simply lower the total taxable amount on the Schedule C or E tax report. 

One should always consult a qualified professional before filing any tax returns.

There is a long list of deductibles that can be reported to reduce taxation on a property. Some of the most important deductions include:

  • Property management fees
  • Insurance on a property
  • Repairs or renovations
  • Depreciation of an asset
  • Mortgage interest
  • Travel expenses such as flights

Tax deductibles when used effectively can save real estate investors thousands of dollars annually or more. 

Property Depreciation & Taxes

According to the IRS, a residential rental property has a lifespan of 27.5 years. Properties are set to depreciate during this period at a rate of 3.636% per year. Essentially that means investors can deduct 3.636% of their property’s value in taxes. So if a property is valued at $200,000 the owner can deduct roughly $7200 from their tax bill.

Depreciation can also be used for home improvements and renovations. For example, if a kitchen is renovated at a rate of $14,000 then the $14,000 of the renovation can depreciate over 27.5 years.

Land on which the property is built cannot depreciate as it can never really be considered obsolete. As such, costs related to it such as landscaping cannot be written off.  

If the property is sold, taxes may be due as part of depreciation recapture tax. This can easily be avoided by using refinance options as opposed to selling. This will defer both capital gains tax and depreciation recapture tax.

Real Estate & 1031 Exchanges

While this applies to American real estate investors and not internationals, a 1031 exchange can assist with taxation. Essentially, a 1031 exchange is a great way for real estate sellers to avoid hefty capital gains taxes.  

A 1031 exchange is a somewhat ambiguous section of the IRS’s code. It allows investors to avert taxes by selling one investment property and buying another within a time frame of 180 days. 

Example: An investor can purchase a property for $250,000 then renovate with a budget of $20,000. After the renovation the investor manages to sell the property for $300,000 and make $30,000 in profit. The investor can then either choose to take his profits and pay capital gains taxes or alternatively reinvest. Should the investor reinvest within the time frame, capital gains taxes are deferred.  

Property and Maximizing ROI

As previously mentioned, one of the best ways to maintain and grow wealth could be real estate investments. That being said, once you own a portfolio, consulting with an expert could maximize your returns. This could be the difference between profits and losses in some cases or modest returns vs hefty ones.

With that being said, holding on to a property and refinancing it periodically may be more beneficial than selling it. 

If you’re interested in refinancing an investment property can help! 

We at USA-Mortgages provide specialized mortgage programs for international real estate investors  interested in purchasing an investment property in the US. Additionally we can offer refinancing options to those who already own a property.

We offer an easy, streamlined solution for non US residents interested in financing or refinancing properties at attractive rates. Our consultants will find the best home loan or refinancing option available and assist you in filling out your application. Make the first step in owning or refinancing a property in the USA. Contact us for more!

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