Special Tax Strategies for Real Estate Investors
Investors are always looking for ways to avoid taxes, and those who buy and sell real estate are no exception. Because the federal tax code is so complicated, people have come up with equally complicated and creative means to escape capital-gains taxes on their profits from trading in property.
Like-Kind Exchanges
Buying another house soon after you sell one enables you to defer payment of taxes on capital gains from the sale of an old property through the purchase of a new one. This is possible because it allows you to designate both transactions as part of one “like-kind exchange,” rather than a gain. However, the gain is rolled over into the next house and thus will still be “due” in some sense, at some point in the future. Market Watch suggests consulting a tax professional on this matter when filing.
Furniture and Equipment Deductions
If you are investing in real estate, buy some furniture or some equipment. According to Andrea Coombes at Market Watch, you are allowed to deduct about $100,000 worth of such purchases. This strategy is endorsed by Sharon Lechter, co-author of “Rich Dad, Poor Dad” with Robert Kiyosaki.
Cost-Segregation Analysis
Andrea Coombes suggests having an expert analyze your property for a “professional cost-segregation analysis,” including the furniture and appliances within, to get a breakdown of how much the value of everything has depreciated. This is more accurate than analyzing the property as a whole, which could pay off at tax time, she says. You can even file amendments for previous tax years to get more deductions, going back up to five years.
Real Estate Investment Trusts
William Exeter, on the website of the tax planning firm Greenstein Rogoff Olsen & Co., writes that some capital-gains taxes from real estate being used as rental property can be avoided if the investor chooses to trade the property in to a Real Estate Investment Trust (REIT) in exchange for shares in the trust. Exeter suggests that the investor will gain liquidity on his investment once the trust is listed on a securities exchange being publicly traded.
Professional Deductions
People who are considered by the federal government to be “real estate professionals” can obtain special tax deductions by writing off losses from their real-estate ventures. To qualify, there are two requirements. First, you must devote 50 percent of your yearly activities to the real-estate industry in some form. Secondly, that time must equate to at least 750 hours a year. Anything, including attending lectures, reading books and driving around looking at houses can qualify.
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