If you’re a real estate investor, you are no doubt feeling the effects of the pandemic in a number of ways. I’ve outlined some general tax tips below that will help you reduce potential loss of income during the COVID-19 crisis.
Meticulous Book Keeping
This is a must, regardless of the pandemic. The most impactful thing you can do is make sure you’re tracking all of your expenses throughout the year. Trust me, you will thank yourself later for keeping accurate, detailed and organized records when tax season hits. There are a number of tax deductions real estate investors are eligible for, including travel, entertainment, advertising, escrow fees, insurance, vehicle expenses, etc. Your tax accountant will be privy to every eligible write-off, but it all starts with good book keeping.
Reinvest In Another Passive Income Property
Something to consider is that it’s a good time to buy. Mortgage rates are at a historical low. A great way to build your portfolio over time is to reinvest profits from one property into a passive income property, which can help generate long-term cash flow. Passive income properties benefit from depreciation deductions, stable income and more. This strategy relates to taxes is because after the sale of a property, many investors will be subject to the capital gains tax. This is a tax on the profits made from the sale of an asset. If you had a particularly successful year investing, it may be beneficial to look into investing in another property to avoid paying these taxes.
Avoid Paying Taxes on Rental Income
Building a portfolio of multifamily properties qualifies you as a real estate professional. Real estate professionals can deploy cost segregation studies to generate large rental losses on paper through depreciation, which you can use to offset the tax liability associated with your “ordinary” income. This will often allow you to simultaneously avoid paying taxes on your rental income and reduce (or even eliminate!) the taxes you pay on your income from a W-2 job or unrelated business.
There are benefits to installing environmentally friendly features throughout your rental properties. For example, you can get tax breaks for energy-efficient improvements like solar panels and solar water heaters. These tax deductions aren’t huge, but they will add up over time. It’s worth looking into these to see if any pique your interest. You can read about which home improvements qualify here:
(NOTE: This says 2018, but it was updated by the IRS Feb. 2020 to include the year of 2020)
The CARES Act
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed in March and its
purpose is to help small businesses in every industry, including real estate. There are a number of tax-related provisions in the legislation that may assist you in obtaining a refund or lower taxes, which will help the liquidity needed to continue operating your business. For example, a business with a net operating loss (NOL) between Dec 31, 2017 – Jan 1, 2021 can carry its NOL back to each of the five taxable years preceding the year of the loss. If the business had taxable income during those earlier years, the carryback of the NOLs may create an opportunity for an immediate refund claim and more liquidity. I highly recommend familiarizing yourself with the CARES Act to see how it can benefit you.