Real estate taxes can be a significant expense for homeowners, especially in high-tax areas. But you don’t have to pay more than you need to – there are several ways to minimize your real estate tax liability. Here are five tips from taxation and real estate experts on keeping the government out of your pocketbook!
Plan your purchase around the tax year.
The best time to buy real estate is during the tax year. That’s because you can deduct the interest on your mortgage and property taxes, reducing your taxable income and saving money on your taxes.
You don’t want to buy in December or January when fewer buyers and sellers might be willing to negotiate on price because they’re eager for their money before year-end (and therefore less flexible).
If possible, try not buying on April 15th-in fact, it might be better if you wait until after October 15th (the extended due date for filing returns). Real estate syndication tax benefits are a great way to get more money for your investment. The IRS allows investors in a syndicated real estate deal to claim property ownership without owning any part.
That way, if there are any changes in your financial situation between now and then (for example, a new job), those changes won’t affect how much money goes toward paying off any debts related to this purchase until after they’ve been finalized through an escrow account managed by title company or attorney(s).
Consider the highest marginal tax rate in determining your deductions.
In determining your deductions for real estate taxes, you need to consider your state’s highest marginal tax rate. This is because deductions are based on your marginal tax rate, different from the average or effective rates used when calculating a company’s overall income tax liability.
In most states, there are three levels of taxation: personal income taxes (which apply only to individuals), corporate income taxes, and capital gains taxes (which apply only to corporations). Additionally, some states have separate brackets for S-Corporations versus C-Corporations; others do not differentiate between these two types of businesses.
For example: In New York State, there are four different brackets within each type of tax: 0%, 4%, 8%, and 12%.
If you’re an individual filing jointly with another person who earns no more than $35k per year, your combined income falls into the bracket of 0%. If both partners earn over $35k, they fall into bracket 4%-as their combined taxable incomes exceed $70k!
Diversify your holdings.
If you own a property that is not rented out, consider selling it and buying another property. This will increase your total number of properties and reduce the risk in your portfolio.
If you have a rented property, consider buying another one so both are rented out (or at least one if there aren’t enough tenants). This reduces the time spent managing each rental property while increasing their income!
Take advantage of annual exclusions, credits, and deductions for first-time homebuyers.
If you are a first-time homebuyer, several tax benefits are available. These include:
The $8,000 tax credit for first-time homebuyers. This refundable credit of up to $8,000 may be claimed on your t2 corporation income tax return for purchasing a principal residence for use as your main home (it cannot be used for a second home or investment property).
The exclusion from capital gains taxes when selling a primary residence after living in it for at least two years out of the last five. The exclusion applies if you sell within two years after buying and live in the home as your primary residence during both periods.
Consider holding real estate in an IRA.
Holding real estate in an IRA can be an intelligent way to avoid paying taxes on the sale of your property. An IRA is a retirement account with tax advantages, and these same advantages apply to real estate held in one.
IRAs allow you to defer taxes on any income or gain your investment generates until you retire and start withdrawing funds from the account.
This means that when you sell real estate held in an IRA, no capital gains tax will be due on profits made from that sale – as long as they remain invested within the account until required distributions begin at age 70 1/2 (or earlier if permanently disabled).
There you go!
Real estate is a great way to diversify your portfolio and build wealth. However, it can also be costly if you don’t plan appropriately. By following these tips, you can ensure that your real estate investments are as tax-efficient as possible so they don’t cost more than they should!
