Income taxes can be a real estate investor’s largest expense and greatest barrier to building wealth. Review this checklist to make sure you are on the right track to lower your taxes on your 2022 return. This checklist will also help you navigate your real estate business in the most tax efficient manner in the New Year.
General Tax Deductions
- Deduction for the use of a home office.
- Deduction for vehicles used in real estate and business activities.
- Travel expenses for long distance rentals.
- Deduction of up to $5,000 in Startup expenses when starting a rental business.
- Elect to be treated as a Rental Real Estate Small Business to take advantage of the Qualified Business Income Deduction for high profit properties.
Real Estate Purchases
- Consider getting a cost segregation study done on larger purchases to accelerate depreciation expense.
- Don’t forget to allocate a portion of the purchase price to land cost.
- Real estate taxes paid to reimburse the seller at closing are deductible in the year paid.
- If possible hold off on big repair expenses until after the property is offered for rent in order to maximize repair write-offs.
- 2022 is the last year to take advantage of the 100% bonus deprecation. This will be reduced to 80% in 2023.
- Deduct improvements up to $2,500 per invoice line item by making the De Minimis safe harbor election on your tax return.
- Personal property items such as appliances can usually be fully deducted using either the 100% bonus depreciation or Section 179 expensing.
- For commercial buildings, interior improvements made after the property is placed into service, are eligible for 100% bonus depreciation.
- Also for commercial buildings, consider using the 179 deduction to write off a new roof, HVAC, fire alarm and security systems.
Deduct Passive Activity Losses
- Deduct up to $25,000 of your rental losses against your earned income if your modified adjusted gross income is under $150,000.
- If you qualify as a Real Estate Professional you can shelter income from your business and W-2 with losses from your rentals.
Short Term Rentals
- Most short term rentals should be reported on schedule E if you are not providing substantial services.
- Offset earned income from your business and W-2 job with losses from your short term rentals if your average guest stay is 7 days or less and you materially participate in your short-term rental activity.
For Flipping, Wholesaling, and Other Business Activities
- Elect S-corporation status to save 15.3% in self-employment tax after paying yourself a reasonable salary.
- Hire your children to help in the business and pay them up to $12,950 per year tax-free.
- Deduct up to $61,000 in 2022, with an additional $6,500 if you are 50 or older for contributions to a self-directed retirement account to fund future real estate investments.
Selling Real Estate
- Use suspended passive activity losses from prior years to offset gains from selling real estate.
- Use a Like-kind exchange to defer paying taxes when selling real estate.
- Consider investing in a Delaware Statutory Trust if you are unable to find a replacement property for an exchange.
- Defer gains into future years with an instalment sale.
The Tax Code contains many incentives to encourage investors to develop and provide housing, but you must implement a proactive approach in order to take advantage of them. Every real estate investor’s tax situation is unique and tax guidance changes frequently. As always, consult with your tax professional as you consider these options. Feel free to email me at email@example.com if you have any questions.