Another year, another tax bill owed to the IRS. But you can make a few maneuvers at the end of the year to lower your tax burden.
Deni and Brian talk through six money moves real estate investors can make at the end of the year, to reduce your tax bill.
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Deni: Hello, everybody, and welcome to Spark Rental Facebook Live and podcast. Brian is near nearby, back in the states, which is nice. And please let us know where you all are joining us from today. Last week, Brian interviewed Mike Murawski. I thought that was really good. I don’t know if you all had a chance to see it, but just an amazing man and what he went through and overcame.
Brian: Yeah, fascinating story about yeah, building, this huge amount of wealth and income through real estate and then losing it all and going to prison and then coming out of prison and rebuilding from scratch as an older guy later in his career. So, you know, we hear a lot of people, a lot of older adults ask us about getting started in real estate later in life. And I go, Is it too late? You know, and it is not too late. And he’s good he’s a perfect example.
Deni: I’m definitely I mean, I started late, so I mean, I’m not going to tell you my age, but it’s never too late to follow a dream. Absolutely. So, I also have some exciting news. Last year, around the same time we gave away a one-year subscription to the prop stream, which is one of my favorite resources that I like to use. And we are doing it again.
Brian: So, well, let’s give a quick introduction about what prop stream is and what it does. Deni, you’re actually you’re even more familiar with it than I am. So, you know. Yeah. Tell us about Propstream.
Deni: Well, I mean, if you have a property you’re interested in, you can pop it in. You can find out all kinds of things. If you have a location that you’re interested in, and you can pop that in, and you’ll get a listing of properties by. Pre-foreclosure, you can find out of studies, divorce or getting divorced, or I mean, literally, it’s like creeping into somebody’s, you know, details of their properties
Brian: On TV or anything.
Deni: It’s a good stalker property program. Just kidding it, really. There’s so much information. They have other tools that you can, you know, add on, like there’s a tool that you can literally get a quote on what it would cost to redo something in the home. Or, you know, which is these are kind of helpful, especially if your flippers. There is just so much.
Read more: How to Flip Houses With No Money Down.
Brian: To start from the very beginning. It’s software that helps you identify distressed properties that you can potentially get a good deal on. So well,
Deni: Well, that’s what you use it for. Yes, sorry. Forgot to add that part.
Brian: Yeah, it’s designed to help real estate investors find good deals, so it lists local foreclosures, local tax liens and divorces, and, you know, other sellers who may be open to a lowball offer in exchange for settling quickly. Right. So, its software designed to help you find good deals, and they also believe they launched a service that sends out mailers for you. Yes. Yes, yes, they do.
Deni: It’s there’s it’s just checking it out. I mean it. It’s worth just checking it out. It’s free for think of like a month Or at least a free trial, so definitely check them out. But we are giving away a year subscription, so I am going to give a link.
Brian: The value went like eleven hundred dollars what they charge for. Yeah, it’s expensive software, so. But very useful.
Deni: So, giving a link in the chat and what you need to do is we’re just asking you to complete a survey, a little quick survey about us.
Brian: Did you put that in the Skype chat or in the FB live.
Deni: I first put it in the skype chat. you guys. I have not been feeling well, so I’m a little off my game. So, but definitely good for laughs. So definitely click on that link. It’s a few quick questions and just asking you about our application, our landlord application, and in return, you’ll be entered into a drawing. What are we doing? The dry? It’s next Tuesday.
Brian: Is that is it that soon
Deni: Tell if you’re out there just to chime in on the chat and let us know when we actually doing the drawing? So, with that being said, today, we are going to discuss six tax moves to make before the end of 2021. Now, I don’t know if you all remember last year it was crazy because they were coming out with new laws and regulations and changes like late like it was well after the beginning of the year. I somehow think it’s now going to be as bad this year, but I think we are going to see some of the same kind of stuff going on and it is next Tuesday, Tara chimed in.
Brian: There will be over the Facebook Live next Tuesday. We will be drawing the winner. Yeah. And the survey literally takes you like 60 seconds to fill out. So yeah, it for a chance to win over $100 worth of software.
Deni: Yeah. So, this year, so now we’re going to talk about some tax moves you want to make. So, Brian, with that being said, why don’t you tell us one of the first things that we should definitely maybe look into here?
Brian: Well, so one thing that is not a surprise. The one thing that you’ve probably heard everyone talk about before is contributing to a tax-sheltered account that you can do in most cases until actually April 15th of the following year for 2021. But so those include IRA for one k 529 Plan for Kids, College Fund, HSAs, et cetera. Now what you do have to do by the end of this year is if you’re planning on doing a Roth conversion, if you’re planning on moving money from a traditional IRA to a Roth IRA or from your traditional four one K to a Roth for one K that you do have to do by December 31st. You can’t wait until after you prepare your tax return to do that. That must be done by the end of the calendar year, unlike new contributions to those accounts, which you can make until April 15.
Deni: I think I read that HSA’s are changing for our benefit, changing some of our regulations, so keep an eye on these things. Yeah. What about charitable contributions, Brian?
Brian: Yeah, absolutely. Those are other things you can do by the end of the calendar year to reduce your taxable income. Now in general, you have to itemize your deductions to take advantage of deducting charitable contributions. If you take the standard deduction, then charitable contributions will not lower your tax bill. That being said, I believe there’s a $300 allowance if you take the standard deduction. You can also take another three hundred dollars off your taxable income for charitable contributions. As a special allowance, then they just added that last year, I think.
Deni: Oh, that’s cool.
Brian: Very cool. Yeah. Trying to encourage more charitable giving, even among people who take the standard, the standard deduction which most Americans do after they raise the standard deduction to be a lot higher in the Tax Cuts and Jobs Act of Twenty Seventeen. So nowadays, because the standard deduction is so much higher, most people take the standard deduction, but they did want to create some benefit tax benefit for people who give charitable donations. So, they added that it’s a $300 special allowance. I think you can take even if you take special, the standard deduction.
Deni: And then it helps people. Yeah, and I think there are changes there, too. And please know that Brian and I are not accountants or financial advisors. That’s a fact. And we’re just going on experience things we know and we’re bringing them to you. But obviously, if you have any questions, you want to make sure you talk to your accountant or financial adviser so that I’m done with that.
Brian: So, another thing you can do as a real estate investor is you can consider doing a 10 30 one exchange to defer paying capital gains taxes on any properties that you have sold recently. Now there are some rules that you need to follow with some 31 exchanges. If you’ve never done one before, there, you do need to understand these rules. So first of all, you have to declare a replacement property within forty-five days of selling the old property. Now you do get a little bit of leeway, you can name up to three replacement properties and only have to pick one of those. But you must settle on the new property within one hundred and eighty days of selling the old property. So, so within forty-five days of selling, you have to declare a replacement property and you can declare up to three different options. And then within 180 days of selling, you have to buy. You just settle on buying the new property to replace it. And you also have to take the proceeds from the sale of the old property, and that has to be held by a qualified intermediary. You can’t take that money for you in your own account. You have to transfer that money directly from the settlement of the old property to an intermediary to hold it in escrow for you. And then the money goes from the intermediary to the settlement of the new property. And we do have an article detailing this stuff
Brian: Yeah, there’s a lot to know about 10 31 exchanges.
Deni: They’re a bit complicated but definitely beneficial.
Brian: Absolutely. And you can. Yeah, you can keep deferring those over and over again. You can just keep replacing and upgrading your properties and never paying capital gains taxes on it. If you keep putting the funds towards new replacement properties.
Deni: Nothing wrong with that,
Brian: Even for your kids. And then the what’s it called the cost basis will reset when upon your death. So, your kids don’t end up paying capital gains taxes on them either.
Deni: I say these things are good to know the other things that we’re saying that you can do is start, you know, get some of those capital improvements done and working for you now. Capital improvements are different, right, Brian, Know, repairs, simple repairs. They definitely are larger expenses, right? I’ll let you explain.
Brian: Right. So, repairs, you can deduct one hundred percent of the costs this year. So, if you have any repairs that you need to make at your property, go ahead and knock them out over the next couple of weeks and then you can deduct the cost of that. Those repairs and you’re twenty twenty-one tax return. Now, capital improvements are changes to the property or work on the property that extends the life of the property or expands the value of the property. So, for example, if you put on a new roof on the property, that is a capital improvement because it extends the life of the property. So same thing, you know, if you replace any of the mechanical systems, if you replace all the windows, you know, these are all capital improvements if you put on this huge new patio. These are all capital improvements that grow the value of the property or extend the life of the property. Now, capital improvements, you can’t deduct those costs within this one year, but you can depreciate them over the next twenty-seven and a half years. So, you divide the cost basically by twenty-seven and a half, and that’s what you can take for each of the next twenty-seven and a half years.
Deni: And I am adding a link to a depreciation calculator.
Brian: Yeah, we have a free depreciation calculator on our website that you can use to run these numbers. Because it does, it does get a little confusing.
Deni: Anything like tax related and any of this stuff is confusing. It’s for a reason. Anyway, another tip you can do is prepay bills. Let’s talk about that, Brian. Mortgage payments.
Brian: Yeah, so, you know, if you pay January’s mortgage payments in December, then you can write that off from this year’s tax return. Write off the interest, for example, from this year’s tax return. And you know, if you cover bills like utility bills on your rental properties, you can prepay those, although actually those bills you have to affect. That doesn’t make any sense, but any bills that you pay before the end of the calendar year that is tax-deductible, you can tell from your 2021 return.
Check out our loan amortization schedule calculator.
Deni: Now, what about making an extra mortgage payment?
Brian: Well, so that would go towards your principal balance, and that’s not deductible. That just goes straight to paying down your loan balance. So, you can do that, and it’ll reduce your principal balance and, you know, pay down your mortgage loan faster, but that will not reduce your tax bill.
Deni: Gotcha. And you could buy property before the end of the year. And if you use prop stream, you might be able to find it better, but
Brian: That would be a really quick settlement in the next couple of weeks.
Deni: Yeah, we’re talking cash. And even then, it would be tough to do at this point, but it’s still possible. You know, it’s happening out there.
Brian: Yeah, so when you buy a property, many of the closing costs are deductible in the same year. And the ones that are deductible are depreciable, you can depreciate them over the next twenty-seven years. So, there’s still a tax benefit there. And then there is something that I want to disappoint. I want to raise that depreciation that I just learned recently, and I’m actually kind of embarrassed that I didn’t know this before. But when you sell a property, a rental property, the IRS actually taxes you. Not just so you have to pay depreciation recapture when you sell a rental property. And I had always thought that if you don’t take depreciation if you don’t deduct for depreciation when your tax return, you don’t have to pay depreciation recapture when you sell the property. That’s actually not true. You have to pay depreciation recapture whether or not you take depreciation on your tax returns for the years that you own the rental property. So, the IRS actually charges you depreciation recapture on what you were allowed to take, not what you actually took. So, if you don’t include depreciation on your tax return for your rental properties each year, you’re getting double tax. So always take depreciation for your rental properties on every single year tax return.
Deni: Wow. And this is why we have to have really good records. You must, if you don’t know, it’s OK. We all don’t know everything, so hire a financial expert because it’s very helpful. And then if you’re hiring a financial hit, don’t just hire any Tom, Dick, or Harry. Just find somebody reputable and you can ask around and whatnot. You’ll see the names
Brian: And somebody who has experience with rental properties because, you know, a lot of accountants, they don’t work with a lot of landlords or real estate investors, and they may not know some of these rules. And so, they might not take depreciation for you when your tax return. So always, always working. An accountant who specializes in working with real estate investors, if you are an investor
Deni: And keep your eyes peeled on, you know the news Google, whatever you look at because we’re going to see changes big time. So, Brian, what else can you tell us or. You know, what can you leave us with here?
Brian: Well, so as a quick recap, so six tax moves to consider making before the end of twenty twenty-one first contribute to a tax-sheltered account, whether that’s a retirement account or an education account or an HSA, or consider doing a Roth conversion, converting money from your traditional IRA to your Roth IRA to make charitable contributions. You do have an allowance to deduct those, even if you take the standard deduction up to a certain limit was $300. Consider doing it ten-point thirty-one exchange if you have just sold a property within the last month or so, or if you’re about to sell one. Four, get those capital improvements working for you. So, if you can make a capital improvement or make repairs and then either deduct or depreciate them, depending on whether it’s a repair or capital improvement. Five, Prepay Consider paying bills such as your January mortgage payment, and six, if you buy a property before the end of the year, that will add a whole bunch of deductions for you come tax time.
Deni: Absolutely. And then one last reminder check out our landlord software and then. I’m going to put in a link again and go ahead and complete a survey, and that survey will ask for your email and then by doing that, you will be put in a drawing for one full year of prop stream, which is like over nine hundred dollars or probably more now.
Brian: Yeah, it’s more now, it’s expensive software and it’s worth every penny we use it. It’s a great way to find deals on real estate.
Deni: Definitely. And that’s it.
Brian: All right, guys. Happy Tuesday. Happy holidays and we will see you next Tuesday to announce the winner of that draw.
Deni: Have a great Tuesday. Bye, guys.