What Are Effective Tax Deduction Strategies for Clients With Real Estate Investments?
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What Are Effective Tax Deduction Strategies for Clients With Real Estate Investments?
Unlock the secrets to optimizing tax deductions for real estate investments with insights from top professionals in the field. In this post, a Managing Partner shares how to qualify for Real Estate Professional Status, while a Tax Specialist provides guidance on maximizing capital allowances. With a total of four expert insights, readers will gain valuable strategies to implement. Discover how these tactics can benefit clients and elevate their financial planning.
- Qualify for Real Estate Professional Status
- Implement Cost Segregation Studies
- Utilize a Good Appraisal Team
- Maximize Capital Allowances
Qualify for Real Estate Professional Status
One powerful tax deduction strategy I've implemented for clients with real estate investments is helping them qualify for Real Estate Professional Status (REPS) under the IRS rules. This designation allows investors to fully deduct real estate losses against other forms of income, which can dramatically lower their tax liability. Here's how it works: to qualify, the real estate investor must materially participate in their real estate activities and spend more than 750 hours annually on those activities, making it their primary business. For investors who meet these criteria—often those with flexible schedules or those who focus on real estate full-time—we strategically structure their activities to ensure compliance with IRS guidelines. For instance, one client, a high-income professional with several rental properties, shifted their focus to actively managing their portfolio and went part-time on their day job. By tracking hours and optimizing their involvement in tasks like tenant management and renovations, they qualified for REPS. This enabled them to deduct substantial depreciation and other passive losses from their real estate against their high W-2 income, resulting in significant tax savings. The key to success here is meticulous record-keeping and a clear strategy for meeting the REPS criteria. When done right, this approach transforms real estate into a tax-efficient wealth-building tool.
Implement Cost Segregation Studies
One effective strategy involves cost segregation studies, especially for real estate investors or professionals. Cost segregation accelerates depreciation by breaking a property into components that can be depreciated over shorter periods, like five, seven, or 15 years, instead of the standard 27.5 or 39 years for residential or commercial properties. This allows investors to front-load deductions, freeing up cash flow in the earlier years of ownership.
For clients with short-term rental properties, we've explored how the short-term rental loophole applies. By qualifying their activities as active participation, they can use the losses generated through depreciation to offset their ordinary income.
Of course, the approach depends on the investor's specific designation—whether they're classified as a real estate professional or a passive investor—so it's critical to tailor the strategy to their filing status and long-term financial goals.
Utilize a Good Appraisal Team
Second only to having an accountant with real estate expertise, I'd have to say the most important part of any strategy is to have a good appraisal team to help ascertain the true value of your property or portfolio. Most think of tax appeals as the obvious strategy, but there are other ways an appraisal can help. You'll need good values and good support for charitable donations, for depreciation of assets, and for cost segregation purposes (allowing you to accelerate depreciation on certain assets). In general, having a good idea of values is the basis for these tax deduction strategies and any estate planning or portfolio decisions.
Maximize Capital Allowances
For clients with commercial real estate investments, we look to ensure that their capital allowances have been maximized wherever possible. This process involves identifying opportunities not only on new acquisitions but also uncovering untapped allowances on existing holdings. In the right circumstances, this can lead to significant tax deductions, improving their overall financial position. Additionally, our expertise helps clients take full advantage of the available reliefs under the current tax framework.
