Before becoming a real estate investor, I always considered the word “tax” to be a dirty word. Fast forward to today, I see the tax code as a treasure map of all the ways I’m incentivized to invest to reduce my taxes—real estate being one of the most powerful investment strategies to lower that liability and create velocity with my money. That’s exactly why smart year-end tax moves matter for every real estate investor.
Regardless of how you invest in real estate, as 2023 ends, now is the time to consider some year-end tax moves that could significantly reduce your tax bill. If these tax moves are new to you, be sure to partner with your tax advisor ASAP to learn how to implement them moving forward. Planning is key!
Year-End Tax Moves: Rental Property Expenses
Ensure you’re claiming all eligible rental property expenses, such as property management fees, maintenance costs, property taxes, and mortgage interest. These expenses can offset your rental income.
Documenting Activities
Keep detailed records of your real estate activities and expenses. Proper documentation will support your claims and deductions in case of an audit.
Year-End Tax Moves: Energy-Efficient Improvements
If you make energy-efficient improvements to your rental properties, you might be eligible for tax credits or deductions. Examples include installing solar panels or energy-efficient HVAC systems.
Depreciation Optimization
Make sure you are correctly claiming depreciation on your rental properties and private equity investments. Depreciation is a tax deduction that allows you to recover the cost of your investment property over time. Correctly calculating and claiming depreciation can reduce your taxable rental income.
Year-End Tax Moves: Cost Segregation Study
Consider conducting a cost segregation study, especially if you own commercial properties. This study can help you identify components of the property that can be depreciated more quickly, providing larger deductions in the earlier years of ownership. Pro tip: If you purchased property in 2023, talk to your accountant and see if doing the cost segregation study in a later year makes better sense.
1031 Exchange
If you’re planning to sell a property, explore the possibility of a 1031 exchange. This allows you to defer capital gains taxes by reinvesting the proceeds into a like-kind property within a specific time limit. Partnering with your accountant and a qualified 1031 exchange intermediary before you put the property up for sale is a smart move.
Year-End Tax Moves: Passive Losses and Active Participation
Understand the rules around passive losses and active participation in real estate activities. Depending on your level of involvement and income, you might be able to deduct passive losses against other income sources. If you meet specific criteria, you might qualify as a real estate professional for tax purposes. Doing so could allow you to deduct rental losses against your other income, even if they are passive losses.
Consult a Tax Advisor
Real estate tax rules can be complex, and tax strategies can vary based on your specific situation. Consult a tax professional or chartered professional accountant (CPA) with expertise in real estate investing to ensure you’re maximizing your tax benefits within the legal framework.
Wrapping Up Your Year-End Tax Moves
These year-end tax moves apply to active and passive real estate investors—passively with much less hassle. If you are a passive investor in one of our projects, we are constantly working to help you optimize all the above strategies within the project itself. There are no tenants, toilets, termites, or trash to contend with. You get to sit back, let us do the work—and let the tax incentives work for you.