The Tax Benefits of Real Estate Investing: What to Know
Mynd Property Management VP Brian Shields Discusses the Tax Benefits of Owning Real Estate
At Mynd Property Management, we manage residential properties in San Diego, the Bay Area and Seattle. Today, we’re excited to talk about the tax benefits available when you invest in real estate.
Read the full transcript of Brian’s interview below:
We think like investors (because we are investors).
Our CEO Doug Brien owns 12 buildings, all of which are managed by us. One of the key components to his success and our success as a property management firm is that we’re able to manage the tax liabilities and the tax benefits that come with owning a rental property.
Today, we’re sharing some of the lessons and best practices we have learned from hundreds of clients, and our own founder’s success.
Be Thoughtful About Investment Property Tax Deductions
Rental property tax deductions have a lot of benefits. Most of the expenses associated with your building can be deducted for tax purposes. For example, if your building brings in $1,000 in rental income, you have to pay taxes on the full $1,000 if you don’t take any deductions.
But, if you believe in the long-term returns on your building, you’ll invest in new paint or new roofing. You might install new windows to keep the heat in. These are things our clients do to make their properties better and to create an efficient use of tax dollars. Instead of paying taxes on $1,000, you can pay taxes on $600, $700, or even $300. That’s a couple hundred dollars you saved, and it puts money back in your pocket.
Take Advantage of Tax Reform Passed by the Trump Administration
New tax benefits and deductions are now available for real estate investors. Real estate has always been tax-efficient, and one new real estate tax deduction opportunity in 2019 is that you can take advantage of the Qualified Income Business Deduction, or Section 199A of the Internal Revenue Code. This new law allows 20% of your rental income to be immediately deducted from your taxes. So, regardless of what you earn (on your rental), you get a 20%t deduction right out of the gate.
Maintain Good Records
Keeping great records can set you up for success at tax time. Make sure you keep all your receipts. Organize what you spend on your building, when you visited, and what types of investments you made in your properties. It works to your benefit to be organized, and it’s better for you at tax time. Your accountant will love you, and your bottom line will benefit.
We have a proprietary system that captures as much information as possible about your building, right down to the unit level. We can work with your accountant to provide day-to-day tax information. Owners who do this are meticulous, highly organized, and good at keeping great records. They will save more money on their taxes than less organized owners. Ask your property management team how they stay organized.
Get Creative: Invest in Qualified Opportunity Zones
Qualified Opportunity Zones allow investors to get creative with managing their taxes. These Qualified Opportunity Zones are based on the premise that investing in low-income neighborhoods will improve buildings and make the community a better place for people to live.
Take the money that you make on other rental properties or different investments and invest it in an Opportunity Zone. When you do this and follow a few rules, you can lower your tax liability by 15%. So, if you made $100 on an investment and put that money in a Qualified Opportunity Zone, you might pay taxes on only $85. That’s a huge benefit.
Opportunity Zones also require you to invest in and improve the property. That’s exciting because you’ll have a beautiful building, and your whole neighborhood will benefit. You can also forgive any capital gains taxes from that moment on. So, invest that $100, turn it into $200, and you pay zero taxes. There are lots of opportunities for leverage.
Other Tax Deductions You May Want to Consider
There are other benefits associated with owning investment real estate (that have been part of the Internal Revenue Code for several years). If you don’t live in the state that the property exists and you need to fly there to visit it, you can deduct your travel expenses. You can also deduct your landscaping bills and the cost of showing the building when you have a vacancy, among other things.
One of the most powerful tools is cost-segregation analysis. It’s a technical analysis that takes your building, and breaks it into smaller pieces for the purpose of depreciation. You’ll look at the depreciation schedule for each piece. You might be able to pull forward some depreciation and shield more of your income so you can reinvest that money. Some of our clients get an extra $10,000 in tax deductible expenses. Take your extra capital off the table and reinvest it.
Measure Everything You Do
If you want to be really tax efficient, you need to have a lot of data on your property. (For example), track the last time you put in a new tub, and make sure you know the model of the old tub. Document what kind of roof you have. At Mynd, we have built a system to capture all of this. We’re really excited about it because it helps our investment clients find more value for their building, and they can do their taxes a little smarter.
Talk to a Tax Professional About Your Rental Properties
At Mynd, we love talking about what’s best for your property and the benefits of investing in real estate. We aren’t tax professionals, but we see a lot of tax benefits for the clients we currently serve, and we’re happy to share what we know. We’re here to communicate with you and your tax professional, so contact us today.