Tax Strategies for Investors

What is Depreciation? The IRS allows you to deduct the cost of your investment property over time, even though the property may actually be appreciating.

Residential Property: Depreciated over 27.5 years Commercial Property: Depreciated over 39 years

Example: Purchase Price: $300,000 Land Value: $50,000 (not depreciable) Building Value: $250,000 Annual Depreciation: $250,000 ÷ 27.5 = $9,090

This $9,090 deduction reduces your taxable income even though you didn't spend anything.

Paper Losses: Depreciation often creates losses on paper while you're cash flow positive in reality.

Accelerate Depreciation for Major Tax Savings

Cost segregation studies identify components that can be depreciated faster:

15-Year Property: - Land improvements (parking lots, landscaping) - Fencing, sidewalks

7-Year Property: - Appliances - Carpeting - Furniture (if furnished rental)

5-Year Property: - Office equipment - Some fixtures

Example Benefit: $300,000 property with cost segregation might yield: - Year 1 depreciation: $50,000 vs. $9,090 standard - Tax savings at 35% bracket: $14,350

When Worth It: - Properties over $1 million - High-income investors - Large portfolios - Cost: $5,000-15,000 for study

Defer Capital Gains Taxes Indefinitely

Sell one investment property, buy another, and defer all taxes.

Requirements: - Like-kind property (real estate for real estate) - 45 days to identify replacement properties - 180 days to close on replacement - Equal or greater value - Equal or greater debt - All proceeds must be reinvested - Must use qualified intermediary

Example: Sell property for $500,000 with $200,000 gain Tax owed: $40,000+ (at 20% capital gains) With 1031: $0 owed now

Strategies: - Trade up to larger properties - Consolidate multiple properties into one - Move from active to passive investments - Continue until death (heirs get stepped-up basis)

Operating Expense Deductions: - Property management fees - Repairs and maintenance - Advertising for tenants - Legal and professional fees - Travel to manage properties - Home office (if applicable) - Insurance premiums - HOA fees - Property taxes

Interest Deductions: - Mortgage interest - Home equity line interest (if used for investment) - Credit card interest for property expenses

Pass-Through Deduction (QBI): - 20% deduction on qualified business income - Applies to most rental income - Subject to income limitations

Keep Records: Document every expense with receipts and notes about business purpose.

LLC (Limited Liability Company): - Asset protection from lawsuits - Pass-through taxation - Flexibility in profit distribution - May complicate financing (some lenders won't lend to LLCs)

S-Corporation: - Can reduce self-employment taxes - More complex administration - Salary requirement for active investors

Multiple LLCs: - Separate LLC per property or group of properties - Isolates liability - Increases complexity and cost

Consult Professionals: - Real estate CPA - Real estate attorney - Tax strategy depends on individual circumstances

Common Setup: - Hold properties in LLC - Use umbrella insurance for additional protection - Keep personal and business finances separate