Most wealthy people invest in real estate – not just homes for themselves and their families, but investment properties, both residential and commercial.
Then, they take advantage of tax strategies that many don’t even know exist. Here are just a few of their money-saving tax strategies.
Nothing is entirely personal.
Smart investors who own vacation properties turn them into rental properties when not in use. This allows them to deduct the ordinary expenses of owing a home: taxes, insurance, repairs, and mortgage interest. Once you need to sell this property quickly, it is possible to look for some local companies, like Coastal House Savers, that can buy it fast and pay the full cost at once. If you’re in the UK, TheAdvisory has a brilliant article on selling your home quickly as well.
They also take advantage of “safe harbors” when it comes to deductions. Under the rules, a capital improvement of more than $2,500 must be added to the cost of the property and depreciated out over the life of the improvement. Therefore, if a roof replacement costs $4,500, only 1/25 could be deducted each year.
According to the guidelines publish by a real estate brokerage Sea Pines, it would appear that under “safe harbor” the owner can instead break that replacement out into its components: labor and materials and deduct up to $2,500 of each. If materials are $2,400 and labor is $2,100, the owner gets to deduct the entire amount as an expense in the year incurred.
Caution: You do need a tax expert helping you with this one, because there are rules to follow if you personally use the property for more than 14 days during the year.
Just as a trucking company can depreciate the cost of their vehicles over time, investment property owners can depreciate the cost of their real estate holdings. (Buildings only, not land.)
The IRS judges the life of a single family home to be 27.5 years, often providing a deduction that exceeds the rental income. Non-residential rental property is depreciated over 39 years.
Here’s how it works: Say you purchase a rental home for $200,000, and after deducting mortgage payments and other expenses, you realize a cash flow of $12,000. According to the IRS the depreciation deduction should be about $16,000 for the first few years, so you end up showing a tax loss of $4,000 to offset your other income for the year.
Note that depreciation does involve some specific calculations, so you do need your tax accountant.
The interesting thing about depreciation is that as long as you maintain the property, it is only a “paper loss.” The IRS calculates that the property will have no value after 27.5 years, while in truth it will most probably be worth far more than you paid for it.
That could be a problem, were it not for the 1031 exchange.
When it’s time to sell that property, the gains you made through depreciation could come back to bite you through capital gains tax – if not for the 1031 exchange.
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Under this rule, you can sell your investment property at a profit and move the proceeds directly into another property while deferring the tax liability.
The rules for a 1031 exchange are strict, so this is a move that needs to be planned well in advance. After selling your initial property you must leave the proceeds with a qualified intermediary while you identify the replacement property, which must be of equal or greater value. You have 90 days in which to identify the replacement – not 91! Then you must close on that purchase within 180 days.
The benefits lie in following the rules – you don’t personally touch that money from the sale and you absolutely adhere to the deadlines.
Your heirs will benefit.
When you pass away the property you leave will be valued as of the day of your death, not as of the day you purchased it. Thus, your heirs will be able to sell that property for full value without paying capital gains tax.
There are more than one ways to ensure that your heir benefits out of your property. One such way is to repair and replace damaged roof of your house so that your heir do not have to fret over them. Contact a residential roofing company in Aurora CO to get essential roof repairs done at affordable prices.
Need some cash to make a down payment on another investment?
Take out a Home Equity Line of Credit on your appreciated investment property. You pay no income tax on the money you borrow, and you can keep on growing your investment Philippines portfolio.
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