Tax-Saving Tips for Real Estate Professionals

In the real estate industry, there persists a common misconception that everything is deductible just because one is self-employed. This myth prevails, and it’s essential to debunk it. Chris Bird, a former IRS agent educate Realtors® about effective tax planning and tax write-offs. He advises on how to find the right accountant. And emphasizes several crucial tax-saving strategies that real estate professionals should be aware of.

Find your proficient tax professional

Rather than sifting through the vast expanse of online information to determine deductibility, one’s first step should be to locate a proficient tax professional, which may be either a Certified Public Accountant (CPA) or an enrolled agent. Enrolled agents have passed a rigorous two-day IRS examination, and many of them have former IRS experience. While lacking these credentials doesn’t necessarily indicate incompetence, it generally increases the likelihood of finding a capable tax professional.

What characterizes a good tax professional? Look for someone who offers more than just a document drop-off service. If you’re merely submitting your documents and retrieving them weeks later without meaningful discussion, you’re not optimizing their services. A quality tax professional will engage with you throughout the year. Additionally, they often serve other successful real estate professionals and may have personal experience as a real estate investor. This may be invaluable if you share similar goals.

Tax-saving strategies

Now, let’s delve into tax strategy. Many people overlook significant deductions related to real estate business and property ownership. These encompass tax laws governing asset depreciation, Section 179 deductions, and bonus depreciation, all of which can substantially reduce your tax liability.

One common mistake is the attempt to minimize income to its lowest possible level every year. While minimizing tax payments is understandable, it’s crucial to consider the broader implications. Doing so can affect your ability to acquire property, impact your retirement planning, and potentially waste your lower tax brackets.

For instance, if you intend to purchase a heavy SUV, it’s unwise to deduct it entirely, depleting your 15% tax bracket. Instead, use it to reduce your taxable income within higher tax brackets, such as 28%, 30%, or 35%. This strategy can yield significantly larger tax savings. The key is to depreciate the asset over multiple years or to employ a portion of the first-year expensing election under IRC 179, rather than expensing the entire cost.

A noteworthy development for 2024 is the Corporate Transparency Act (CTA), which requires accountants (or business owners) to submit a report to the Financial Crimes Network (FINCEN) detailing entity ownership. This applies to all small businesses operating as corporations (S or C), partnerships, or limited liability companies (LLCs) that have filed state formation documents. This impending requirement should be on your radar when consulting with your accountant early in 2024.

A skilled tax professional can yield substantial savings and provide valuable tax planning insights. Remember, the goal isn’t solely to minimize taxes but to build a prosperous financial future.

It’s important to understand that not all expenses are deductible, and distinguishing between personal and business expenditures is crucial to avoid complications with the IRS. A competent tax professional plays a vital role in helping you differentiate between these categories and maximize your legitimate business deductions.