Real estate investments make a great tax shelter. Experienced real estate investors will tell you that it’s much less expensive to consult a professional to help you avoid unnecessary headaches, legal expenses, and financial losses. Understanding the nuances of the tax laws designed to benefit real estate investors is essential to help realize the maximum yield from your hard-earned investment dollar to create passive income streams and secure your financial freedom.
Incentives are provided for real estate investors to promote economic growth and development as well as to assist in the need for low-income housing through programs like the low-income housing tax credit (LIHTC) program for disadvantaged rural or urban areas. The maze of rules and regulations can seem overwhelming even to more experienced investors who seek to utilize every tax benefit available to earn the highest possible returns on their investments.
To give you a handle on taking full advantage of these benefits, our team of professional investors has broken it down to the basics with our ultimate tax guide for real estate investors in Massachusetts.
Please be aware that we are not attorneys or tax consultants. This article is for informational purposes, not financial, legal, or tax advice.
Maximize Depreciation
Most residential rentals depreciate at a rate of 3.636 percent per year over 27.5 years, which lowers taxable income for investors. Depreciation allows for the recovery of costs of income-producing property. There are a few ways to realize extra depreciation; the first tip in our tax guide for real estate investors in Massachusetts. A cost segregation study will identify realty-related costs that investors can write off faster with the additional first-year depreciation deduction. Then, for components with a life of fewer than 20 years, you can use 100 percent bonus depreciation. Investors can also use passive losses to offset their passive income.
Documenting Non-Dealer Status
The next tip in our ultimate tax guide for real estate investors in Massachusetts is carefully documenting your non-dealer status. The IRS considers many factors in determining if you’re a real estate dealer or passive investor, and the difference could cost you 15.3% of your income in self-employment tax on rental real estate.
Accounting Methods
Another fundamental is your method of accounting, cash or accrual, in our ultimate tax guide for real estate investors in Massachusetts. The cash method reports your income in the year earned and expenses in the year paid, while the accrual method reports income or expenses in real-time. Good habits in recordkeeping and a reliable system to track your real estate income and expenses will help ease the process.
Utilizing 1031 Exchanges
A valuable tax strategy for real estate investors in Massachusetts is the 1031 exchange, which allows investors to defer capital gains taxes on the sale of investment properties by reinvesting the proceeds into a like-kind property within a specified time frame. This process enables investors to grow their portfolios and accumulate wealth more effectively by delaying tax payments on capital gains. Understanding the rules and requirements of 1031 exchanges, such as the identification period and replacement property guidelines, is essential for successfully implementing this tax-saving strategy. The professional investors at Pegasus Home Buyers can guide you through the 1031 exchange process, ensuring you adhere to IRS regulations and maximize the benefits of this powerful investment tool.
Opportunity Zones
Another tax advantage for real estate investors in Massachusetts is investing in designated Opportunity Zones. These economically distressed areas offer significant tax incentives for investors who commit to long-term investments that promote economic growth and development. By investing in an Opportunity Zone, you can benefit from deferred capital gains taxes, potential tax-free appreciation on the investment, and even a reduction in capital gains taxes based on the holding period. The professional investors at Pegasus Home Buyers can help you identify and evaluate potential Opportunity Zone investments, ensuring that you maximize the tax benefits while making a positive impact on the community.
Self-Directed IRAs
A lesser-known but powerful tax strategy for real estate investors in Massachusetts is utilizing a self-directed IRA (Individual Retirement Account) to invest in real estate. By holding real estate investments within a self-directed IRA, you can enjoy tax-deferred growth on your investment gains, allowing your portfolio to grow more rapidly over time. Additionally, this approach provides a level of asset protection, as the assets held within the IRA are generally shielded from personal creditors. It is crucial to understand the rules and restrictions associated with self-directed IRAs, such as prohibited transactions and disqualified persons, to avoid potential tax penalties. The professional investors at Pegasus Home Buyers can help you navigate the complexities of using a self-directed IRA for real estate investing, ensuring you reap the benefits while remaining compliant with IRS regulations.
Type of Ownership
One more tip from our ultimate tax guide for real estate investors in Massachusetts is determining the best type of ownership for your holdings which will depend upon your personal preferences financial goals and tax situation. You’ll need to understand the time and effort involved with direct ownership, where you have more control over the outcome and the opportunity to ensure you maximize your profits. REITs or real estate investment trusts allow you to invest without having to wear the hat of a landlord. Or alternatively, owners can pool their money in online investment platforms to purchase properties they might not otherwise afford.
Understanding Deductions
Our final subject in our ultimate tax guide for real estate investors in Massachusetts is the importance of researching to ensure you take advantage of all deductions available. For example, you can deduct interest, repairs, travel, your home office, employees, casualty losses and not to be overlooked, depreciation. Additionally, you can write off expenses that relate to starting your business, locating properties, limited advertising costs, and even cell phone and internet services. Tax laws are subject to change, and you should discuss them with a real estate attorney, your accountant, or a professional tax advisor. In addition, the rules and regulations of tax laws and how they apply to you can vary depending on the circumstances.
We’re happy to answer any questions about our ultimate tax guide for real estate investors in Massachusetts; talk to one of the professional investors at Pegasus Home Buyers today without any obligation. At Pegasus Home Buyers, our professional investors know the tips and tricks and the latest technology to help make managing your real estate investment business easy. At Pegasus Home Buyers, you’ll find our professional investors have done the legwork and built community connections that benefit investors like you, bringing skilled tradespeople to handle any job and providing reliable estimates on potential investment properties. Additionally, at Pegasus Home Buyers, there is added cost and time savings through the efficiency of our full-service in-house team of industry specialists from inspections to closings. You’ll also have access to our top-notch team of property management professionals at Pegasus Home Buyers to protect your investments and keep your tenants happy. Call Pegasus Home Buyers at (781) 810-4242.