Learn how to dramatically reduce your income taxes and better your real estate wealth with this big strategy.
With income taxes increasing for those in the top brackets, there is limited time to begin tax planning for the future. Before long, you might be giving up an even larger portion of your hard-earned money to the IRS. In addition, we are on the verge of watching a wave of inflation begin to erode the buying power of whatever money is leftover.
If you follow my social accounts or read my blog, you know that I think people in finance need to change the way they think of the ROI for real estate assets. As a financial planner focused on real estate agents and investors, I understand the tremendous return that rental real estate investments can add to your financial situation.
The likely scenario is that we will see rates increase beginning in 2022. That gives you a little time to reduce income taxes with some strategic planning. As we see the housing market continue to trend upwards, that is likely to mean that your income will as well. If you want to make sure your tax bracket doesn’t also increase, then consider these options.
As a real estate agent, you undoubtedly have some rental real estate investments. Maybe you have been putting off that new heater, stove, or flooring. Or maybe your Airbnb needs furniture upgrades? One of the best things to come out of the recent tax reform (Tax Cuts and Jobs Act), is 100% bonus depreciation. What this means is that instead of depreciating large improvements over a schedule of years, you can write off 100% of the depreciation in the first year.
You may be thinking, “yeah, but I’m not going to buy a fancy refrigerator for a college rental”. I get it. The great news is that the tax reform allows for 100% bonus depreciation for used items, as well!
So why do this? Well, because if you know that your tax bracket is going to increase next year and you might be making even more income as the housing market continues on, then bonus depreciation allows you to take some serious deductions.
For example. My client and friend, Sarah, is at the top of her real estate game. Fortunately, and unfortunately, Sarah is going to push over the $400,000 income threshold that President Biden’s tax plan is targeting for tax increases. But she is likely to be just above that threshold, leaving some room to keep her below that mark. Sarah owns and manages 2 full time rentals and 1 Airbnb. Having many tenants and guests over the years, she has been considering some upgrades. One of her rentals has an 11 year old water heater and her Airbnb occupancy rate has been dropping. She believes with increased Airbnb competition, her unit does not have that Instagram-worthy free marketing.
After a conversation with myself, her financial planner, and her tax accountant, she realized that this might be the year for some upgrades. Sarah purchased the new water heater with installation for $3000. For her Airbnb, she really wanted a statement accent wall and some new furniture. All improvements for her Airbnb costs $12,000.
Here is the breakdown of her deductions and tax savings:
$3,000 water heater
$12,000 Airbnb upgrades
$15,000 total deductions
X 50.9% top federal and state tax brackets
= $7,635 in tax savings
*Based upon a hypothetical situation and not to be taken as tax advice.
As you can see, this strategy can add up to big tax savings. In addition, she is keeping her units up-to-date, increasing Airbnb traffic, and adding to the cost basis of her rentals, which ultimately decreases future potential capital gains!
Don’t let tax increases catch you off guard. A good financial planning strategy should include proactive tax planning year-round to better your overall return on income. With the proper guidance, you can have access to advice that helps you in real-time take advantage of the right tax deductions.
If you need specific advice relative to your finances, I’m here to help. Click the button below for a free financial plan!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Asset allocation does not ensure a profit or protect against a loss.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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.
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.
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.