Limiting your tax bill not only provides you with the necessary funds for property improvements but also enables you to invest in other properties. It is often mistakenly believed that these loopholes only apply to wealthy investors. However, this is simply not true.
Real estate loopholes are available and legal for all investors. The wealthy investors are just more aware of them because they can afford the best advisors. Now, you too can tap into these secret loopholes that the rich have been benefiting from for years. Are you ready to learn what they are? Read on to discover the top real estate loopholes.
Pass-Through Business Income
In 2017, Congress introduced the Tax Cuts and Jobs Act, which provided investors with yet another reason to rejoice. This legislation included a business loophole that permits investors to deduct 20% of their business income.
If you earn $157,500 a year or less ($315,000 for those married and filing jointly), you can deduct 20% of your business income from your taxable income. This deduction applies to certain types of businesses such as LLCs, partnerships, sole proprietorships, and S-Corporations. Real estate investment income, including income from real estate investment trusts, also qualifies under this loophole.
1031 Exchange
Have you ever considered selling a property to upgrade to a new one but hesitated due to the capital gains tax? The good news is that you can defer these taxes by employing a real estate loophole.
A 1031 Exchange, outlined in IRS Code Section 1031, allows you to sell a property used for business purposes (e.g., an investment property or business warehouse) and utilize the funds from the sale to purchase your new property. However, it's important to be aware of the rules and deadlines associated with this process. The IRS mandates specific time frames for identifying and closing on your new property: 45 days and 180 days, respectively. Furthermore, a qualified intermediary is required to facilitate the exchange and ensure compliance with IRS regulations.
721 Exchange
Similar to a 1031 exchange, a 721 exchange is another hidden real estate loophole. It enables investors to defer capital gains on the profits from the sale of a property. However, unlike a 1031 exchange, this loophole does not necessitate investing in another property considered "like-kind."
With a 721 exchange, you have the flexibility to invest your profits in real estate investment trusts or other partnerships. This opens up a multitude of possibilities, allowing you to diversify your investments or move away from hands-on property management while still benefiting from tax advantages.
Depreciation Deductions
When purchasing an investment property, you have the option to write off the entire purchase as a business expense. While this can provide an immediate refund, it may be more advantageous to consider a smart tax strategy known as depreciation.
Depreciation allows you to deduct a portion of the property expense over several years. For commercial properties, the expense can be written off over 39 years, resulting in an annual deduction of over $7,000. For rental properties, the deduction period is 27.5 years, enabling you to deduct over $10,000 per year.
Home Office Deduction
If you have a dedicated home office used solely for business purposes, such as real estate investment, you can take advantage of the home office deduction. This deduction allows you to deduct a percentage of your home expenses, including mortgage payments and utilities. Even if you are a renter, you can still benefit from this deduction.
It's important to note that the space must be exclusively used for business activities. A home office that doubles as a guest bedroom or game room does not qualify for this deduction.
Interest and Related Expenses
Many real estate investors overlook basic yet effective tax-saving strategies, such as deducting business expenses and interest paid on properties. Interest, in particular, can be a substantial tax deduction, especially for recently purchased properties.
If you have incurred expenses for repairs, cleaning, or other necessary costs related to your rental property, these expenses are deductible. To ensure compliance, it is essential to maintain meticulous records of all business-related receipts.
Use the Real Estate Loopholes to Your Advantage
Every investor should assess their tax obligations and strive to minimize them ethically. Real estate loopholes offer an opportunity to lower your tax burden legally. By doing so, you will have more funds available for investments or personal use. Take advantage of these loopholes, but be sure to consult with a knowledgeable tax professional to ensure you make the right deductions.
Remember to check back on this site regularly for financial tips and lifestyle articles to enhance your real estate investment journey.
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