Important Tax Considerations for Real Estate Investors

When you decide to invest in real estate you must be prepared to do a lot of work before the investment. Real estate is one of the markets that involve a high risk and important tax considerations have to be made in order to succeed. In today’s article we are going to look as some of the key analysis you need to make and laws you need to consider if you want to be a successful real estate investor.

What Should I Analyze?

There are 3 main areas that need thorough analysis:

• Your goals and objectives as a real estate investor
• The real estate market
• Benefits vs. costs of the investment

If you are investing in a property, first you need to know what you want to gain from your investment. It could be regular fixed income from rents, a tax shelter (especially if in a high tax bracket), generating a profit over a few years or simply diversifying your investment portfolio.

Researching and analyzing the market is crucial to your success. You need to know what kind of property you want to invest in - is it private or commercial, and what is the current demand for properties like that. Also, look into the trends - is the market rising or declining? Are there any economic, social or political factors that can significantly impact the real estate market in the near future or as long as your investment lasts?

Lastly, before you go ahead and put your money down for a particular property you need to carefully assess the benefits and costs of the investment. The benefits may be different depending on the goals you’ve set. They could be the amount of rental income, the appreciation, as well as the physical advantages of the property such as location, features, new build, etc. The costs do not only include the actual price of the real estate, but also mortgage interest and other ongoing expenses like insurance, fees, utilities, property taxes and others.

Click to Download our guide about: 10 Real Estate tax strategies

What Taxes Should I Consider?

After you have analyzed your goals, the market, and the benefits and costs, you want to make very careful tax considerations, which will determine whether you will generate good profits or register losses. In other news, you need to perform smart tax planning as a real estate investor. The first important tax to consider is the federal income tax. With the new tax plan there are 7 tax brackets, which are as follows:

• 10% Up to $9,525 single/ Up to $19,050 married couples
• 12% $9,526 to $38,700/ $19,051 to $77,400
• 22% 38,701 to $82,500/ $77,401 to $165,000
• 24% $82,501 to $157,500/ $165,001 to $315,000
• 32% $157,501 to $200,000 / $315,001 to $400,000
• 35% $200,001 to $500,000 / $400,001 to $600,000
• 37% over $500,000/ over $600,000

So you need to calculate how much will your annual income be including your investment and after you’ve taken out all relevant deductions. If you think you may be entering a high tax bracket, consult with a CPA for more feasible tax planning strategies.

You need to check the amount of the property tax, which will depend on the size, condition and location of the real estate you are investing in. Some states like Florida, California and New York, for example, have high property taxes.

State tax also needs to be considered, especially after it has been announced that with the new tax plan the SALT deductions will be eliminated.

11 Extra Tax Tips for Real Estate Investors

There’s more advice we’d like to share with you.

1. You may deduct depreciation, which will make up for some of your buying costs.
2. Your depreciation allowance will not be affected by any debt.
3. If you are holding a property for investment properties you may be able to deduct various costs, such as insurance, management fees and interest.
4. Your interest and/or construction period tax should be capitalized up to 10 years after the investment.
5. You can include other maintenance expenses in your tax planning.
6. If you make a real estate investment through a partnership you may encounter more attractive opportunities.
7. You can deduct casualty losses if you hold a property for investment purposes.
8. Investment in low-income housing is encouraged by more tax incentives.
9. You can save on capital gains if you have the right strategy.
10. You can take advantage of like-kind exchanges to defer taxes.
11. You may also be able to defer tax on a property sale by using the installment method.

If you want to learn more about smart tax planning strategies for real estate investors, contact us today. FAS CPA & Consultants are dedicated to helping you on the way of becoming a successful investor and maximizing your wealth through good tax planning. You can get a free 30-minute consultation if you email us on [email protected].

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