There are a lot of things to consider in real estate investing. To truly maximize your profits, you must take full advantage of the tax benefits for real estate investors. Everyone wants to pay the minimum amount of taxes necessary. These three tips will help ensure your investments are operating properly and in a manner that minimizes your tax liability.
Hire an expert CPA
Your first instinct is to do everything yourself, but for your investments to operate optimally, there are times you need experts working for you. Taxes are not something you want to learn through trial and error.
Find a Certified Public Accountant (CPA) who specializes in real estate investments. Speak to other real estate investors about which professionals they use for their taxes, but keep in mind that you do not have to use the same person just because someone else is very pleased with their performance.
You need to have a good rapport with your CPA. You should feel comfortable calling him or her for advice and a consultation whenever necessary. You want someone who is knowledgeable about tax law and can explain things to you in clear language so you can make informed decisions. It may take you some time to find the person who is the right fit for you. Don’t stop looking until you find a CPA you trust and feel comfortable communicating with on a regular basis.
Separate short-term and long-term investments
Short-term investments like property flips, rehabs, and any wholesaling typically bring you a return in less than one year.
Apartments and other rental properties are considered long-term investments. They should exist under separate entities. Choosing the right entity protects you and supports taking more aggressive tax deductions than those that are available to a sole proprietor.
An LLC lets you use documents like an operating agreement to authorize deductions for things like auto expenses, meals, travel to find properties, and education. The type of entity that is best for each case may be different, so consult with your knowledgeable and experienced CPA about which entity structure works best for you.
Take full advantage of depreciation deductions
Depreciation is the best kind of tax deduction. It does not require you spend any additional cash to qualify for the deduction. A $10,000 depreciation deduction in a 30 percent tax bracket will save you $3,000 in taxes. That money can go toward purchasing additional property and generating even more income for you.
Working hard to earn money is great, but maximizing your available tax savings will help you become wealthy much sooner.
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