If you’re at all familiar with real estate investing, you know that one of the biggest advantages that proponents of real estate investment laud are tax benefits. This benefit, however, can sound vague to anyone who isn’t familiar with tax law or doesn’t handle their own taxes—and let’s be honest, most of us don’t!
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Investing in real estate is a straightforward venture...in theory. Buy a property, rent out the property, make money off of the rent. Simple, right? Unfortunately, theory isn’t reality. We have to deal with things like market climates, taxes, insurance, property management, tenant screenings, turnover, and all sorts of unforeseen complications.
One of the most daunting things for anyone of any age, real estate investor or not? Taxes.
For us, there are some unique tax advantages that we can use to leverage real value. We aren’t talking about creative tweaking that bends the rules to create write-offs. We’re talking basic principles in real estate investment that can minimize how much you pay in taxes each year, thus maximizing your passive income.
Some of these are relevant for your annual taxes, while other will be relevant year-round and for your investment strategies and decisions!
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Cash Flow Real Estate Investor Tax Tips:1. Keep all receipts.
The U.S. Government Accountability Office (GAO) explains the most common problem with the tax returns of those who buy investment property: lack of documentation. According to one article, "individuals (or couples filing joint returns) tend to misreport their net income from rental real estate activities more frequently than other types of income." The most common issue is cash flow real estate investors who don't keep excellent track of their rental income and their property expenses. If you want to be certain to avoid these problems, keep all of your receipts together in a safe place.
2. Go green.
Certain property improvements or renovations can help save you money on long-term utility costs as well as offering generous tax credits, rebates, or deductions. Alternative energy installations, for example, often have excellent federal, state, and even local tax incentives. Such installations might also help attract potential renters and increase the value of the property itself as well as the amount that you can charge in rent for such an upgraded cash flow property.
3. Hire a professional.
Even with the best organization and planning, it can still be complicated to manage your existing properties and to buy investment property. This perhaps explains why the GAO reports that about 80% of real estate investors choose to pay an accountant to help them keep their taxes straight. A paid tax professional is likely to help you know how to categorize different expenses for maximum tax benefit. For example, according to one recent article, "if your year has been profitable enough to place you in a high tax bracket, then your goal at year-end should be to increase real estate tax deductions while putting off more income until the coming year (January 1). On the other hand, if your year has been less than stellar, placing you in a low tax bracket, then you want to do the reverseóput off tax deductions until the following year while increasing your income for the present year." Many cash flow real estate investors are more comfortable letting a professional make that decision each year.