Real estate investment is a great way to protect and grow your wealth. Real estate is historically safer than the stock market and often provides a great return on investment. There are many options available for real estate investors in Orlando to capitalize on writeoffs and other tax haven strategies. Here are some of the ways to make the most of your investment.
The most common write-off for real estate investors in Orlando are tax deductions most frequently associated with rental properties. These write-offs include items like: mortgage interest, property tax, operating expenses, depreciation, and repairs. If you are managing the property, you are able to write off ordinary and necessary expenses for managing and maintaining the rental property. As with any time you are looking at tax write-offs, consult your accountant.
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. A lot of investors will hold a property for over a year so they can benefit from a lower tax rate. If your gains are less than your losses, you can also 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!
Depreciation is another rental property focused write-off that is calculated from three main factors: what the property is 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 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 depending on your business structure. 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 or distressed. Because this program is so new, make sure to keep up on the requirements because they could change. To find out more about opportunity zones in the Orlando Metro market, click https://www.orlando.gov/Initiatives/Opportunity-Zones.