Tax Benefits of Investing in Real Estate

Karlton Dennis is a licensed tax strategist who specializes in helping small businesses and real estate investors understand tax planning and implement tax strategies throughout the year, instead of just following tax compliance codes at the end of every year. He has built several successful sales teams throughout the years by following some of the most successful business owners in the world today.

We will talk today about how to use key performance indicators (KPIs) to make strategic business decisions as opposed to just hoping your cash flow remains steady enough to pay your CPA. Follow us to stay abreast of the possible tax code changes for 2021 and beyond.

What Will Happen with Real Estate Tax Codes in the Biden Administration?

1031 Exchange

The 1031 Exchange has been in our tax code for a long time, and it is considered one of the great wealth builders and tax benefits of investing in real estate. It is the process of swapping out one investment property for another one to defer the capital gains tax. One of the rules surrounding the 1031 Exchange is the properties must be held for investment purposes and be of a like-kind. There is no limit to the number of times you can do a 1031 Exchange, as long as each transaction meets the requirements of the IRS.

However, recently President Biden has expressed some interest in getting rid of the 1031 Exchange. Most tax strategists do not believe the Biden Administration will move forward with removing this tax code, but it is still something we should be mindful of going forward.

Capital Gains Tax Rate

The capital gains tax is a tax on investments. It’s calculated by the growth rate of the investment at the time it is sold. Once an investment is sold, the capital gains are “realized” by the investor. One of the tax benefits of real estate investments is you can sometimes defer this capital gains tax. The current capital gains tax rates for an investment held over one year are 0%, 15%, or 20%, depending on your income.

Recently, President Biden made a statement that he would like to raise the capital gains tax rate back up to 28%, which would have a direct effect on all real estate investments. While we cannot be sure if this will take effect any time soon, you should still be aware of possible changes to the real estate tax code that could affect your real estate investments.

C-Corp Tax Rate

The current C-Corp tax rate is set at a flat 21%. Business owners are still paying a double tax under a C-Corp umbrella since the profit of the corporation is taxed, and it is taxed when distributed to shareholders.

The Biden Administration has discussed raising the C-Corp tax rate back to 35%, which was the top rate before 2017.

What Is Likely to Stay the Same with the Biden Administration?

Cost Segregation Benefit

The Cost Segregation Study is a tax planning tool that allows real estate investors to accelerate depreciation and defer federal and state income taxes. It is primarily used by real estate investors who have expanded, remodeled, purchased, or constructed any kind of real estate.

Currently, there have not been any talks within the new administration to eliminate the Cost Segregation Study, which is good news for real estate investors. It would be difficult to eliminate this tax planning strategy because of the Modified Accelerated Cost Recovery System (MACRS). This was implemented in 1987 and requires that most rental properties depreciate on a straight-line schedule.

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Important Tax Strategies for Real Estate Investors

Amend Your Tax Returns

You have up to three years to amend your tax returns once they have been filed. If you are new to real estate investing, then this might be a huge tax benefit for you. Many first-time investors are unaware of the many tax benefits of investing in real estate.

We recommend going back and looking over your tax returns from the previous years to ensure you have used all the tax advantages available to you.

Understand Your Numbers in Real Time

You should track your key performance indicators (KPIs) in real time so that you can make the smartest business decisions possible. It is important to understand how well each department in your company is doing and how much money you are making per month. Are you seeing growth every month, or are your numbers staying the same? You should be asking yourself these questions as often as you can instead of waiting until the end of the tax year.

Make Use of SBA Loans if Needed

This strategy may not be for everyone, but it could help some investors greatly. The Small Business Administration (SBA) has loans available for business professionals whose business has been impacted by recent events. They are providing these loans at an all-time-low interest rate. It might be wise for you to use the help while it is accessible to you.

Summary

Tax planning is a critical aspect for real estate investors and business owners to consider. Real estate investors need to understand the tax strategies that can help them currently and in the next few years. With the new Biden Administration, it is more important than ever for you to stay abreast of new tax laws and possible changes that can impact your tax returns. To hear more about the tax benefits of real estate and self-storage investing, feel free to reach out to us to see how to maximize your returns.

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