What are some of the best way to shelter taxes in real estate? This is a common question real estate investors want to know, with good reason.
The number one way you can reduce taxes is buying buying real estate in the first place, since you have the mortgage interest tax reduction option when you buy property through a loan. But there are a few more ways to shelter or save money through buying real estate.
And of course, if you can get a loan with a low interest rate, which is the case right now, then over the long term you will make money renting out your property even without any tax breaks.
Depreciation is a deduction on paper of the value of the property—no money goes out. The deprecation is of your costs not the actual appraisal of the property. But this can offset other gains and act as a tax shelter. So you could own a property where you break even but the key value is in the way you can shelter for capital gains from another property or asset through this depreciation. And, don’t forget the appreciation of the property over time.
For example, if your income is less than $100K, you’re allowed to shelter $25,000 of earnings from other sources of income. The key here is that in order qualify for this sheltering of other sources of income--you must actively manage your real estate properties.
The key though is when you buy a property you can make a small downpayment but depreciate the entire value of the property.
Time to Sell
Timing your real estate losses with your gains. If possible, sell a property that’s lost value when you plan on selling a property that’s gained value, that way the capital gain tax will be canceled out by the loss from the other property. Also, there are differences in the percentage you must pay on capital gains based on how long you’ve held a property.
Although it can take a toll on your family if you have to move, and that’s why most investors you make use of this tax break don’t have children, but if you live in your property for two years you’re exempt from the capital gains taxes of up to $250K if you’re single and $500K if you’re married using a free tax calc. Usually, the appreciation is not on the scale of $250K, unless you’ve lived in the home for an extended period of time, but either way, any not taxed gain is money in the bank.
Developer Tax Breaks
There are tax benefits or even grants to builders or developers who are revitalizing a community or neighborhood. Try to work with the local community or government to see what tax breaks you can get if you're going to build in the area.
Refinance Your Loan
If you refinance a property you can pull money out that’s not taxed. It’s like pulling money out of a piggy bank but you don’t have to break it, the property is still intact and will continue to appreciate over time.
Upkeep and maintenance costs on a property can be deducted from your taxes. There are also taxes breaks when you install solar panels and many states are offering tax breaks when you do things to make your property more energy efficient.
Learn more about ways to shelter or save money on taxes through a 1031 Exchange.