As the end of the year is quickly approaching, there are some hard-and-set financial deadlines that real estate professionals should know. Although the majority of financial strategies can be implemented by the tax return filing deadline, there are others that are not granted that extension.
In an effort to make sure that you take advantage of all financial strategies available to you, I want to give the most important financial strategies that need to be implemented by the end of the current calendar year.
Not all of these strategies apply to everyone’s situation, but these are often the financial investments that real estate professionals can apply to help build wealth and reduce their tax burden.
Here are the financial strategies that have end-of-year deadlines:
1. Solo 401(k) Plan Adoption
Solo 401k plans are one of the best retirement plan vehicles for real estate professionals. I won’t go too far into the features, as I’ve written about them at length here, but there are many reasons to adopt one. Not only do you have less income restrictions on contributions, but you can also add a Roth component, have loan features, and even self-direct into alternative investments if desired.
However, if you don’t already have a Solo 401k and you would like to set one up for the current year, it must be adopted and created by December 31st for the contributions to count in the current tax year. This doesn’t mean you need to fund your Solo 401k this year….that can be done by the tax return filing deadline.
BUT, you must have the Solo 401k fully and officially adopted and set up through a third party to have those contributions counted in the current tax year, and effectively, reducing your current year tax burden.
2. Roth Conversion
Roth conversions can be an extremely valuable financial strategy, and one of my personal favorites for those in the right situation. I won’t go too far into the details of this strategy, as I’ve written previous blogs on Roth Conversions. But, if you are a in the early-mid stage of your real estate professional career and have a year in which you might make less income, it can make sense to “convert” some of your pre-tax (Think IRA, SEP IRA, 401k) retirement funds to post-tax retirement funds (Roth IRA, Solo Roth 401k).
Why would you do this? Well, you would be paying taxes upfront now at a lower tax rate (if you are in a lower income year…or if you believe taxes will just be higher in the future) to later have tax-free growth and tax-free withdrawals- given the IRS rules are followed. Over the long-term, this can potentially create significantly more long-term success than the traditional pre-tax retirement that forces you to pay taxes later at future tax rates.
But, the really important thing to note is that the deadline for Roth conversions, NOT contributions, is December 31st of the current tax year. New Roth contributions (not conversions) can be made by the tax return filing deadline.
3. Deductible Business Expenses
If you want to get credit for investments that you made into your business, then those purchases have to be made in the year that you want the deduction. So, if you are still looking to increase deductible expenses in the current tax year, then that must occur by December 31st. Expenses like, car purchases, office equipment, HVAC units, new flooring, etc, can really make a huge difference in the tax bill for your business.
4. Bonus Depreciation on Real Estate Investment Improvements
2022 is the last year, in which, you can take 100% bonus depreciation for certain improvements on real estate investments. That is, you can claim the bonus depreciation up until the tax return deadline, but you must have made the expense and improvement by December 31st of the current tax year.
You can depreciate 100% of an improvement like a new HVAC unit if the purchase of that unit was made by the end of the year. That can potentially save you some pretty good tax money. So, if you have thought of improving one of your rental properties, now is the time to do it before the year is up.
If you have taxable brokerage accounts, you might have some imbedded capital gains in some of your investments. Whether that be stocks, mutual funds, ETFs, or crypto, you can offset some of those capital gains by selling some of your losers too. The last couple of years has had some ups and downs across all markets, so taking some of those losses by year-end can help you save on taxes.
6. Charitable Contributions
Charitable contributions above the standard deduction can make a huge impact on the amount of income you keep at the end of the year. But, those contributions must be made by the end of the current year. Contributions made after January 1st get applied to the following tax year. Again, I want to emphasize that if you are making those charitable contributions to receive some tax benefit, those contributions need to push your itemized deductions over the currently high standard deductions.
If you have questions about your personal situation, speak to a CERTIFIED FINANCIAL PLANNER™ who works specifically with real estate professionals, like myself, who can help find the right set of strategies for you.
Asset allocation does not ensure a profit or protect against a loss.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.