Podcast Summary
Understanding Real Estate Taxes: A 5 Out of 10 Must: Real estate taxes significantly impact ROI, bonus depreciation is an accelerated method to write off a larger percentage of property cost in first year, understanding tax concepts optimizes investment strategies.
Real estate investors should aim to increase their understanding of taxes, specifically as it relates to real estate investing, to at least a 5 out of 10. This is important because tax benefits are a significant component of the return on investment for real estate. Recently, there has been newsworthy tax news regarding bonus depreciation. Brandon Hall, a CPA and expert in real estate taxes, joined the podcast to explain. Depreciation is a non-cash expense that allows investors to write off the cost of a building over time as it deteriorates. Bonus depreciation is an accelerated method of depreciation that allows investors to write off a larger percentage of the cost of a property in the first year. This news is important for real estate investors because it can impact their cash flow and potential tax savings. Understanding these tax concepts can help investors make informed decisions and optimize their investment strategies.
Tax benefits for real estate investors through depreciation and bonus depreciation: Real estate investors can claim tax deductions on their property costs through depreciation, and bonus depreciation allows for larger first-year deductions on certain components. However, bonus depreciation is phasing out, so it's crucial to consider for current and future investments.
Depreciation and bonus depreciation are significant tax benefits for real estate investors. Depreciation is an expense that allows investors to claim a portion of the cost of their property each year as a tax deduction, effectively sheltering their cash flow. The calculation is based on the purchase price allocated to the building and the useful life of the property. Bonus depreciation, on the other hand, enables investors to write off a larger portion of the purchase price in the first year, particularly for components with a shorter useful life. This can result in significant tax savings, especially for new investments. For example, in a $500,000 acquisition of a single family home, a cost segregation study could identify personal property components with a useful life of 5 or 7 years, allowing for larger first-year deductions. However, bonus depreciation is phasing out and will continue to decrease as a percentage of the purchase price, making it an important consideration for current and future real estate investments.
Identify personal property components for tax deductions: Cost segregation studies help maximize tax deductions by distinguishing between 5-year depreciable personal property and 15-year depreciable land improvements in multifamily properties
A cost segregation study can help identify personal property components in a multifamily property that can be easily removed and reused in another rental without causing damage. These components, which include things like carpeting and fixtures, have a 5-year depreciable life, allowing for a larger first-year deduction through bonus depreciation. Meanwhile, land improvement components, such as parking lots and signage, have a 15-year depreciable life. Understanding these distinctions can help investors maximize their tax deductions and optimize their cash flow.
Impact of bonus depreciation on tax liability when selling a property: Bonus depreciation lowers adjusted basis in a property, increasing taxable gain upon sale and subjecting it to ordinary income tax rate instead of capital gains rate.
While passive real estate investing through platforms like Connect Invest offers a hassle-free way to earn monthly income, it's essential to understand the long-term tax implications of bonus depreciation. When you take bonus depreciation, your adjusted basis in the property is lowered, which can impact your tax liability when you sell. For instance, if you buy a property for $500,000, take bonus depreciation of $100,000, and sell it for $470,000, your taxable gain would be $70,000, not the $30,000 loss you might initially assume. This is known as depreciation recapture, and it's taxed at your ordinary income tax rate rather than the lower long-term capital gains rate. Therefore, it's crucial to weigh the potential tax consequences against the benefits of passive real estate investing.
Maximizing Bonus Depreciation for Real Estate Investments: Use bonus depreciation to invest in more properties, equities or pay off loans, not for personal expenses. Qualify as a real estate professional to fully benefit, or file jointly with a spouse who does. Be aware of tax implications when selling or disposing of depreciated properties.
When it comes to taking advantage of bonus depreciation for real estate investments, it's important to remember that it's not a free pass to buy expensive cars or toys. Instead, this tax benefit should be used to invest in more properties, equities, or pay off loans. The rules around bonus depreciation can be complex, especially for those who aren't considered real estate professionals by the IRS. To qualify as a real estate professional, one must spend at least 750 hours per year working in the real estate industry, and it cannot be a secondary source of income. If you're not a real estate professional, you can still take advantage of bonus depreciation if your spouse is, as long as you file a joint tax return. However, it's crucial to be aware of the potential tax implications of selling or disposing of the depreciated property in the future. Ultimately, the goal should be to grow your capital, not just reduce your taxable income in the short term.
Maximize tax savings with cost seg studies for rental properties: Rental property owners, even without real estate professional status, can benefit from cost seg studies to identify and reclassify certain costs as property improvements, increasing depreciation through bonus depreciation and offsetting passive income or losses from other sources.
Even if you're not a real estate professional, you can still benefit from a cost seg study for your rental properties. This study allows you to identify and reclassify certain costs as property improvements rather than building costs, making you eligible for additional depreciation through bonus depreciation. This can be particularly useful if you have passive income or losses from other sources, as you can use the losses from the cost seg study to offset them. Additionally, the benefits of a cost seg study aren't limited to real estate activities; passive income or losses from other investments can also be offset using this method. So, while real estate professional status may impact your eligibility for some tax benefits, it doesn't exclude you from utilizing a cost seg study to maximize your tax savings.
Leveraging Real Estate Depreciation for Passive Income Tax Savings: Leverage real estate depreciation to save taxes on passive income. Depreciation is an accounting method reducing asset value over time, with bonus depreciation for faster deductions. Carefully manage passive income and losses, and consult tax experts for opportunities like 1031 exchanges and Vacasa management services.
Passive income from a business can be offset by using real estate depreciation through Section 469. This strategy can save significant taxes for those who are knowledgeable about it. Depreciation is a method of accounting that allows the reduction of the value of an asset over time. Bonus depreciation can be used to accelerate the deduction. Passive income and losses must be carefully managed, and accountants often overlook this opportunity, especially those with limited real estate clientele. To learn more about commercial real estate, entrepreneurship, and tax strategies, tune in to the Walker webcast. Additionally, consider tax-deferred exchanges with 1031 Pros to save on capital gains taxes when selling a property. Lastly, Vacasa can help make owning a vacation home profitable and hassle-free by managing the property and earning homeowners an average of 20% more revenue.
Exploring the Importance of Therapy and Financial Uncertainty: Therapy helps individuals prioritize their values and reduce stress, while financial uncertainty from proposed legislation could impact businesses' ability to write off expenses and raise capital
Therapy, specifically through online platforms like BetterHelp, can help individuals identify and prioritize what truly matters to them in life, enabling them to make the most of their time and reduce stress. Meanwhile, in the world of finance, there's ongoing uncertainty regarding the passing of a proposed bill that could impact bonus depreciation for businesses. The bill, which has passed the House and is headed to the Senate, may not be discussed until after the Senate recess in early March, leaving many businesses in a wait-and-see mode. Key aspects of the bill include the indexing of the child tax credit for inflation and the potential reversal of the requirement for a 5-year amortization period for R&D costs. The latter change could significantly impact tech companies and their ability to write off expenses, potentially making it harder for them to raise capital.
Extension of 100% Bonus Depreciation for Real Estate Investors: The US tax bill extends 100% bonus depreciation for real estate investors in 2023-2025, funded by recovering fraudulent ERC refunds. It also increases the 1099 reporting cap to $1,000 and addresses Section 163 j for larger investors.
The new tax bill under consideration in the US Congress includes an extension of the 100% bonus depreciation for real estate investors for the years 2023, 2024, and 2025. This extension is primarily funded by recovering fraudulent Employee Retention Credit (ERC) refunds. The bill also proposes increasing the cap for reporting 1099 forms from $600 to $1,000, providing some relief for filers. For larger investors, Section 163 j is also being addressed in the bill to improve the deducting of business interest. Overall, the bill is expected to pass with bipartisan support and benefit real estate investors. Other provisions in the bill may impact specific industries or individuals but are not expected to significantly impact most Americans' day-to-day lives. However, there were holdouts on the bill regarding the State and Local Tax (SALT) deduction limit, which could impact high-tax states like California and New York.
Exercise caution when filing real estate tax returns due to legislative developments: Investors should hold off on filing real estate tax returns until the SALT cap is raised and necessary software updates are made to ensure accurate deductions for state and local taxes.
Due to ongoing legislative developments, real estate investors and their CPAs need to exercise caution and patience when preparing and filing their tax returns. With the possibility of the SALT (State and Local Tax) cap being raised from $10,000 to $20,000 for married filing joint taxpayers, investors who have bought property and used bonus depreciation or cost segregation studies in 2023 should hold off on filing their returns until the bill is signed into law and the necessary software updates have been made. The passage of the bill and subsequent software updates will impact how much investors can deduct for their state and local taxes, resulting in significant differences if returns are filed before the new legislation is in effect. This legislative uncertainty underscores the importance of staying informed and working closely with tax professionals to navigate the complexities of tax law changes.
Tax bill causing delays in software updates for real estate funds: GPs should communicate potential tax return delays to investors, understand tax implications, and work with professionals for informed decisions. Investors can use BiggerPockets Agent Finder for guidance on real estate investing and tax planning.
The recent tax bill is causing delays in tax preparation software updates, which could impact the timely filing of tax returns for real estate syndicates and funds. GPs of these funds should communicate this potential delay to their investors. Brandon Hall, a tax expert, emphasized the importance of understanding the short-term and long-term implications of tax laws, and the need to work with professionals to make informed decisions. Although the speakers made complex tax topics understandable, it's important for investors to have a basic understanding of these concepts and be able to communicate effectively with their trusted advisors. The BiggerPockets Agent Finder can help investors find the right agent to guide them through the intricacies of real estate investing and tax planning.
Connect with investor-friendly agents for free on BiggerPockets.com/deals: Access expert help in real estate investing by connecting with investor-friendly agents for free on BiggerPockets.com/deals
BiggerPockets.com/deals offers a free resource for those looking to invest in real estate by connecting them with investor-friendly local agents. By entering some details about what and where they want to buy, users can instantly be matched with an expert who can help navigate neighborhoods, analyze numbers, and build confidence in making a successful investment. Remember, past performance is not a guarantee of future results, and it's essential to consult with qualified advisors before investing. So, head to biggerpockets.com/deals today to find your investor-friendly agent and get closer to financial freedom.
