In 2019, my family enjoyed an early Christmas present. We recieved a tax return of nearly all our federal tax withholding by following the tax law and investing in clean, safe and affordable housing.
During my professional career, tax season was always uncertain, frustrating and emotional. I wrote more than a few 5 figure checks back to the federal government. I didn't know there was a better way. I was ready for change, we got educated and began investing in real estate.
How do I pay less tax? Do tax savings in real estate help me save and earn more money?
The 74608-page-long federal tax code includes a small section in the front on how to pay your taxes. The majority of the written federal tax code is how to not pay tax. A better way to say it is that the government needs help to create jobs, housing and services to its citizens and therefore provides tax incentives. The Government wants to encourage clean vehicle purchases; offer a tax incentive. Want to discourage cigarette smoking; tax packs of smokes.
The amazing tax advantages of real estate are available to both passive and active investors.
Here are a few examples:
Write-Offs - A primary source of tax efficiency of real estate is the ability to write off expenses including direct and indirect expenses related to a project, operations and your business.
Depreciation - Depreciation is a magical tax benefit. Tax code states that as an owner you are eligible for annual tax deductions equal to the value of the building divided by 27.5 years (although we know buildings last much longer). Each year you can take a certain amount of depreciation which can translate to tax-free income in your real estate investments.
Cost Segregation - An extra tax advantage for income properties is to ability to send a qualified engineer to itemize all components of a building into buckets of depreciable life (5, 15, & 27.5 years). The government recognizes all parts of a building are not the same durability. Lights degrade faster than roofs. This study allows you accelerate depreciation.
Accelerated Depreciation - Accelerating depreciation is about taking tax advantages now while the dollar is most valuable. The cost segregation report is provided to your tax professional for inclusion into your annual tax return. Real Smart Assets provides a K1 report to investors to make your tax process easier. The current tax code allows for bonus depreciation, which further accelerates all 5 and 15 year property into your first year of service!
Tax Abatement - Property tax is a given for home owners and investors alike. However, certain economic zones offer programs for tax-free operations for as many as 10 years or more. The projects are typically value-add with a significant construction component such as new construction. Real Smart Asset target tax abatement programs to create value for our investors.
Opportunity Zone - Extra special areas called 'Opportunity Zones' are treated in such a way that if you add considerable value, such as new construction for full renovation of a dilapidated building, you may qualify for capital gains deferral or even elimination of the gain all together. So if you are selling a large amount of stock, a business or real property and are interested in opportunity zone investing, you may not have the full tax liability. See a tax professional for additional guidance on opportunity zone investing.
What will be your tax benefit of investing in our latest offering Maple Flats?
Our investors are owners. As owners you are entitled to a portion of the accelerated depreciation to apply towards your cash-flowing real investment such as Maple Flats. Consult your tax professional for specific advise.
Now that I have learned more about government operations locally, state level and nationally, I see there is much help needed, tax being one key component. I pay my fair share of taxes and when able, I invest my money into creating clean, safe and affordable housing.