For real estate investors, the end of the year isn’t about wrapping up deals. It’s a critical time to take advantage of tax-saving strategies to help you keep more of your hard-earned money. If you don’t plan ahead, you may find yourself rushing to reduce your tax bill or, worse, missing out on valuable savings. But with the right steps, you can significantly lower your 2024 tax liability and set yourself up for financial success.
Here’s a guide to the most effective tax moves you can make before the end of the year.
1. Take Advantage of Accelerated Depreciation
Depreciation is one of the most significant tax benefits for real estate investors. If you haven’t done a cost segregation (cost seg) study on your rental property, now is the time to consider it. A cost seg study breaks down your property into components (like fixtures and appliances) that can be depreciated more quickly. This means bigger deductions in the early years of ownership, which reduces your taxable income.
You don’t need to complete the cost seg study by December 31—just close on the property by then. You can do the study early next year and still apply the savings to your 2024 return.
Don’t own property? You can still benefit by investing in real estate equity deals that plan to do a cost seg study. If the deal closes by year-end, you can share in the accelerated depreciation.
2. Execute a 1031 Exchange
If you’re selling a property, a 1031 exchange lets you defer capital gains taxes by reinvesting the proceeds into another property. This can help you avoid a large tax bill and keep your money working for you.
For example, if you’re selling a rental property with a $200,000 gain, a 1031 exchange could save you from paying up to $30,000 in capital gains taxes this year.
Note: You must identify a replacement property within 45 days of the sale and close on the new property within 180 days.
3. Prepay Expenses
Another straightforward way to reduce your taxable income is to prepay property expenses. You can pay property taxes and insurance premiums or make necessary repairs before the year ends to shift those deductions into 2024.
This strategy is particularly useful if you’ve had a high-income year and want to maximize your deductions.
4. Utilize the Qualified Business Income (QBI) Deduction
If you own real estate through an LLC, S-Corp, or even as a sole proprietor, you may qualify for the Qualified Business Income (QBI) deduction. This deduction allows you to deduct up to 20% of your qualified business income, which can lower your taxable income.
Eligibility depends on your income level, so check with your CPA to see if you qualify.
5. Shift Income to Your Children
If you have children, you can reduce your tax burden by shifting income to them—especially if they’re in a lower tax bracket. In 2024, children can earn up to $14,000 without paying federal income taxes. You can pay your kids for tasks they perform for your real estate business, such as managing paperwork, marketing, or property maintenance. These wages are a deductible business expense, reducing your taxable income.
Bonus: If your business is a sole proprietorship or single-member LLC, you don’t have to pay Social Security and Medicare (FICA) taxes on wages paid to children under 18. Plus, you can contribute their earned income to a Roth IRA, giving them a jump-start on retirement savings.
6. Maximize Your HSA Contributions
If you have a high-deductible health plan (HDHP), contributing to a Health Savings Account (HSA) can be a powerful tax-saving move. HSAs offer a triple tax advantage:
1. Contributions are tax deductible.
2. Earnings grow tax free.
3. Withdrawals for qualified medical expenses are also tax free.
For 2024, you can contribute up to $4,150 for individuals and $8,300 for families, with an extra $1,000 for those 55 and older. You can even invest the funds within your HSA, allowing it to grow tax free over time.
7. Harvest Capital Losses
If any of your properties or other investments have lost value this year, you can harvest capital losses to offset gains elsewhere in your portfolio. This can help reduce your overall taxable income for the year.
For example, if you sell a property or stock at a $50,000 loss and have a $50,000 gain on another asset, the losses and gains cancel each other out, leaving you with no taxable gain.
Bonus: If your losses exceed your gains, you can offset up to $3,000 of ordinary income and carry any remaining losses forward to future years.
8. Talk to Your Accountant About Tax Credits
Tax credits can directly reduce how much you owe in taxes, making them especially valuable. Here are some credits worth exploring:
• Residential Energy Credit: For adding solar panels, wind turbines, or other renewable energy systems to your home.
• Electric Vehicle (EV) Credit: If you bought an electric vehicle, you could get up to $7,500 for a new EV or $4,000 for a used one.
• Business Credits: If you own a business, investigate the Research & Development (R&D) Credit and the Work Opportunity Tax Credit (WOTC).
• Opportunity Zone Credit: Investing in designated Opportunity Zones lets you delay or reduce capital gains taxes.
9. Charitable Donations
Donating appreciated assets—like real estate or stocks—can help you avoid capital gains taxes on the appreciation while still giving you a tax deduction based on the asset’s fair market value.
10. Consider a Roth Conversion
If you think you’ll be in a higher tax bracket in retirement, consider converting funds from a traditional IRA or 401(k) to a Roth IRA. Although this triggers taxes now, future withdrawals will be tax free. This can be especially beneficial if tax rates increase in the future.
Wrapping Up
Consult with your CPA to ensure you make the right moves before the December 31 deadline. By implementing these end-of-year tax strategies, you can significantly reduce your 2024 tax burden and keep more of your income working for you. These strategies not only lower your taxes today, but they also lay the foundation for smarter financial decisions in the future.
