Real estate investment is a great way to protect and grow your wealth. Real estate is historically more safe than the stock market and can have a great return on investment. There are many options available for real estate investors in Detroit to capitalize on write-offs and other tax haven strategies. Understanding write-offs will give you a great advantage when investing in property. Here are some of the top ways to make the most of your investment. Reach out to us to discuss these methods and see what will work best for you.
The most common write-off for real estate investors in Detroit are tax deductions most frequently associated with rental properties. Understanding write-offs including items like mortgage interest, property taxes, operating expenses, depreciation and repairs will give you an edge. As the property manager, you are able to write off ordinary and necessary expenses for managing, conserving and maintaining the rental property. These repair and maintenance expenses do not increase the value of the property, they simply keep the property in good condition, that is why you are able to write them off.
The capital gains tax depends on how long you own the property. If you own the property for less than one year, you will have to file that profit with your regular income. You will definitely want to try to own the property for more than one year, those profits are taxed at a much lower rate, and if your gains are less than your losses, you can offset thousands of dollars of taxable income. Even homeowners can take advantage of the capital gains tax laws and not pay taxes on up to $500,000 of profit!
Understanding write-offs is an essential part of having success as a landlord. Depreciation is another rental property focused write-off that is calculated from three main factors: the basis of the property, or what it’s worth; the recovery period for the property, and the depreciation method used. The most common method of depreciation is called the Modified Accelerated Cost Recovery System (MACRS). The IRS allows real estate investors to deduct depreciation on a piece of residential property for 27.5 years, and 39 years for commercial real estate properties.
The 1031 exchange allows real estate investors to trade properties of similar value with little to no tax at the time of exchange. You can roll over gains from one piece of property to another without paying taxes on it until you actually sell the property, preferably more than a year from the date of exchange to take advantage of the capital gains tax law. There are some criteria for utilizing this exchange, the properties must be of about equal values, the properties must be traded for some sort of real estate asset including Real Estate Investment Trusts (REITs), and the property must be held for productive purposes in business or trade.
Tax-Deferred Retirement Accounts
There are some Health Savings Accounts (HSAs) and Individual Retirement Accounts (IRAs) that will allow you to purchase properties with the tax-deferred, meaning you can invest in real estate now and pay taxes on it later. There may be annual contribution limits or real estate type restrictions, so make sure to do your research on these accounts before getting in too deep.
As a property manager and real estate investor, you may be able to write off your self-employment tax if your business is structured correctly. Being self-employed means you are 100% responsible for paying the Federal Insurance Contributions Act (FICA) tax on your own income. For normal employees, this tax is split between the employer and the employee.
You may or may not have heard of opportunity zones; these funds are a fairly new concept that was introduced in 2018 as a tax incentive to have real estate investors contribute capital gains with deferred or no tax on their original investment. Be aware, these zones are generally extremely rural and distressed. Because this program is so new, make sure to keep up on the requirements because they could change.