5 Real Estate Tax Secrets Of The Rich
I read an article on Realtor.com this week that I thought you might be interested in as we’re all getting our financial papers together for April 15th. Most of these strategies involve investment properties, so if you have a beach home or rental property here are some great thoughts about maximizing your tax savings this year. I’ve abbreviated the key points, but you can read the full article here.
Strategy No. 1: Take advantage of ‘safe harbors’
Smart investors don’t let second homes lie vacant, but rent them out, says Crystal Stranger, president of 1st Tax and author of “The Small Business Tax Guide.”
Not only will you make extra cash, you can deduct expenses such as repairs, insurance, real estate taxes and mortgage interest.
One red flag: If you personally use the property for more than 14 days during the year, your tax implications can change, so check with your accountant to make sure you’re in the clear.
Strategy No. 2: Depreciate your rental property
The IRS views a rental property as a business expense and expects it to depreciate over time. Ka-ching! You can deduct a portion of the cost of the home what are called deprecation losses—for upward of 27.5 years (the amount of time the IRS thinks is the deductible life of a single-family home).
Strategy No. 3: Depreciation is actually a ‘phantom deduction’
The rich know that these depreciation losses for rental properties—defined by the IRS as an allowance given to property owners for the “exhaustion, wear and tear (including obsolescence) of property”—is, in fact, a “phantom deduction.” Phantom because, as Than Merrill, CEO and founder of FortuneBuilders.com, points out, while the IRS compensates landlords for the depreciation of their assets, homes tend to do the opposite and appreciate in value. And therein lies the true value of depreciation losses: If the value of your property rises, the loss the IRS allows never actually takes place. So you save money on taxes and make a profit at the same time.
Strategy No. 4: The 1031 exchange
This tax rule allows people to sell an investment property for a profit and move the proceeds directly into another investment property while deferring the tax liability. If done right, you can ratchet up the value of your holdings in real estate without eroding your capital by paying capital gains tax, says Ailion.
Strategy No. 5: Leave more money to your heirs
If you use the 1031, your heirs will be left with real estate that has a much lower tax basis than its actual value when you die. This is because the tax law specifies that when someone passes away, the gain inherent in their investments disappears.
In the weeks ahead I’ll give you a few case studies of clients and friends of mine who have bought property in Asbury Park. I’ll take you through what brought them to Asbury, and if they purchased here to live full time, part time, or as an investment.
In the meantime, if you’re considering getting into real estate investing or if you want a list of local income-producing property, let me know! I can help you figure out what works best for you.
