This article is part three of our ongoing series, Ask a Real Estate Advisor. Check out Real Estate Tax Advice for Current Investors and How to Start Investing in Real Estate to learn more!
There’s more to owning real estate than flipping homes or collecting rent. The more houses you own, and the longer you own them, the more complicated your taxes will become—and the bigger role tax strategy should play. Whether you inherited a home or are actively seeking real estate investment opportunities, the key to maximizing your ROI is minimizing the taxes you owe.
At Cook Wealth, we help our real estate clients do just that, with tailored tax strategies built around their unique financial plans. And while every tax strategy is a little different, they’re typically built with three key tax deductions and benefits in mind.
If you own real estate, don’t overlook these three tax benefits you might be eligible to take advantage of this tax season:
1. Depreciation
Forgetting to deduct the depreciation on your real estate properties is an expensive lesson. Depreciation is a particularly valuable tax benefit that allows real estate investors (and homeowners) to deduct the cost of their property over the course of its useful life. But if you forget to take this deduction, or don’t realize you’re eligible for it to begin with, when you sell the property, the benefit is lost.
The IRS allows residential rental property owners to depreciate their property over a 27.5-year period, and commercial property owners can depreciate their property over 39 years. In other words, if you own rental or commercial properties, you can deduct a portion of your property’s value as an expense every year!
How impactful is this deduction? Consider this example:
Say you’ve owned an investment property here in Raleigh for nearly a decade, and it’s worth about $450,000. Once we do a depreciation calculation, we realize your annual depreciation value is just over $10,000. That means every year for the past 10 years, you’ve been paying significantly more in taxes than you had to!
If you never have someone like Cook Wealth take a second look at your tax return, you may miss out on significant deductions year after year. When it comes to depreciation, that can add up to hundreds of thousands of dollars in savings over your lifetime.
2. Deductible Real Estate Expenses
A second major tax benefit of owning real estate is the opportunity to deduct your real estate-related expenses.
Most homeowners and investors are familiar with expense deductions. When fridges go out, washers quit spinning, and locks need replacing, these deductions are practically no-brainers.
But there are a few additional real estate expense deductions you may be overlooking, including:
- Travel. Did you know you can count your travel expenses to and from your rental properties as deductions? The gas it takes to get there, or the airfare and hotel if your rental is in another state or country, can be deducted from your year-end tax bill.
- Employee expenses. If you hire a contractor or additional support staff to help manage and maintain your real estate, these expenses can be tax-deductible.
- Legal services. Another often-overlooked deductible real estate expense is the cost of working with a lawyer to negotiate contracts or review your rental agreements.
By properly tracking and documenting these expenses, and working with an advisor who understands the complexities of real estate, you can reduce your overall tax liability and meaningfully improve your real estate ROI.
3. Qualified Business Income (QBI) Deduction
Real estate investors who operate their properties as a business may be eligible for the Qualified Business Income (QBI) deduction. The QBI deduction is a significant tax benefit introduced under the Tax Cuts and Jobs Act (TCJA) that allows eligible taxpayers to deduct a portion of their qualified business income.
For real estate investors, the rental income generated from their properties can qualify as QBI under certain circumstances. For example, your real estate investing must be considered a business and you have to meet certain other criteria.
If you qualify for the QBI deduction, you can take up to 20% of your qualified business income from your taxable income. That can add up to substantial tax savings!
At Cook Wealth, our multi-angle approach to finances aims to leave no benefit—or tax break—on the table.
Managing your taxes can feel complicated and overwhelming. Especially if you own real estate and investments, or earn income across multiple states. That’s why our joint tax and wealth advising team considers every aspect of your financial situation to help you enjoy greater ROI, stronger tax savings, and a tailored financial plan you can feel confident in. Learn how Cook Wealth helps clients live life empowered by booking an intro call with our team.