In my last post, I suggested that you won't make money until you have 4-6 properties. What I mean by this is that you won't have a constant revenue stream to live on until your property count increases; but for tax purposes, many property owners always show they have a loss, saving mega bucks on taxes. How do they do that?
Here are a few things property owners are doing to save that cash.
Cost Segregation Studies: A cost segregation study is an analysis of a rental property's assets to determine the most advantageous way to depreciate them for tax purposes. By classifying certain assets as shorter-lived personal property rather than longer-lived real property, you can accelerate depreciation and reduce your tax liability.
1031 Exchanges: A 1031 exchange allows you to defer capital gains taxes when you sell a rental property and reinvest the proceeds into another like-kind property. This can be a powerful tool for building wealth and reducing tax liability over time.
Passive Income Losses: If your rental property generates a loss, you may be able to use that loss to offset other passive income, such as income from other rental properties or investments. However, the IRS limits the amount of passive losses you can claim in a given year, and there are special rules and limitations to consider.
Real Estate Professional Rules: To qualify as a real estate professional for tax purposes, you must meet certain criteria, such as spending the majority of your time on real estate activities and materially participating in those activities. If you meet these criteria, you may be able to deduct rental losses against your non-passive income, such as income from a day job.
I consider all of these items to be "complex" tax strategies. With careful planning, we can get it done though! Just please don't be "that client" who came to me at tax time saying they exchanged one property for another last year - without a qualified intermediary (broker) - asking for a deferred gain. It don't work like that. Contact me NOW if you are even relatively interested in being strategic.