Ways You Can Increase Your Tax Savings When Investing in Real Estate

Investing is a good way to make good use of your hard-earned cash. When it comes to investments, you have a lot of options. If you want a tangible investment, real estate is one investment option to consider.

Real estate investment offers many perks. You get to diversify your portfolio and produce cash flow by renting out your property. The value of properties often increases, which means that you can have that hedge against inflation. But do you know that even if you earn by being a property investor, you can still enjoy tax advantages and use some strategies to boost your savings?


Do a like-kind exchange

Also known as a 1031 exchange, this type of tax-saving strategy occurs when purchasing a similar property. This only applies to real estate that is not owner-occupied. A DST 1031 exchange allows you to enjoy tax deferral benefits without having to worry about managing the property itself. You can enjoy property ownership without doing all the hard work expected of an individual property owner.


Deduct all real expenses possible

When you’re a real estate investor, you can deduct a number or real expenses as well as a couple of paper expenses from your tax. The great thing about this is that there is usually no need to itemize your deductions one by one. Some of the items you can reduce on your taxable income are your property taxes, mortgage interest, legal fees, insurance, property management, advertising expenses, and maintenance costs.


Own your real estate for at least one year

If you choose to sell a real estate property after obtaining it less than a year later, the IRS will tax the profit gained at a normal rate. If you choose to hold on to your property and sell it only after a year or so, you can reduce your capital gains. It is a good idea to lease the property for at least a year before selling. You can still earn some money while waiting for the right time to sell.


Take advantage of MACRS

The modified accelerated cost recovery system (MACRS)is a type of depreciation method that allows you to deduct the larger amount of taxes during the early years of your property ownership. As time passes by, the deductions will be lowered. Each year, the amount you use to tackle property renovations can be deducted from your ordinary taxable income. When it comes to depreciation, the higher the tax rate, the better, as this equals more tax savings.


Live and flip the property within a couple of years

Are you fond of improving properties? If you think that you can live in a house while continuous upgrades and improvements are made, then you can consider a live-in flip. The amount of capital gain that will be considered tax-free will depend on your marital status. For single individuals, you can exclude a maximum of $250,000. This can go as high as $500,000 if you and your spouse file for a joint return.


These are but a couple of ways you can earn and save money while doing real estate investing. Not all may apply to your situation, but you can find a strategy that will best suit your case. By keeping this list in mind, you can increase your savings and get the most out of your investment venture.

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