biden tax changes impact on real estate investors

What end-of-year financial moves should you make, to minimize taxes and maximize profits?

From ways to minimize your capital gains to depreciation and beyond, savvy real estate investors know all the tricks at their disposal.

In this episode you will benefit from the best end-of-year tricks to be prepared when it comes money and real estate.

Deni & Brian talk last-minute money maneuvers to help you keep more of your money in your own pocket.

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What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

live off rents podcast transcript

 

Deni Supplee: Hi, everyone, and welcome, good to see everybody again. Please let us now welcome back to our weekly broadcast and podcast. Please let us know where you’re tuning in from. And if you were with us last week, you talked with us about rental property, depreciation and depreciation capture. Brian gave us a lot of information. We got a lot of good comments and questions as well.

Deni Supplee: This week we’re going to be talking about taxes and stuff here. Our money moves for real estate investors. You know, we all dread the end of the year to April 15th and get an extension in the whole nine yards. But they’re here. We’re going to provide you with some good, useful information on how to maximize some of your deductions. And please, we have to add this disclaimer. We are not financial consultants, nor are we accountants.

Deni Supplee: So please make sure that if if you’re going to use any of these strategies or if you have any questions about them, that you direct them to your accountants. That being said, Brian, start us off. What about those capital improvements?

Brian Davis: Sure. So capital improvements extend the useable life of your builder and they are depreciable. That means you can deduct the cost of them over many years instead of taking all of that deduction in a single year. But, you know, if you get rid of them now or if you anything you pay now towards capital improvements, you can start depreciating for this year. So if there is a an improvement to your property that you’ve been thinking about, you know, consider doing it now.

Deni Supplee: Talk to us a little bit about because I know this is a confusion for a lot of people. What is a capital improvement compared to, you know…

Brian Davis: Yeah. So capital improvements, they extend the life span of your building or raise the property value. So an example of a capital improvement is a new roof on the property, a new furnace, for example. Anything that extends the useable life of the building as opposed to maintenance or repairs which are isolated thing or repairs are just isolated expenses to fix something that’s broken and maintenance is ongoing upkeep costs such as painting, mowing the lawn, you know, on going.

Deni Supplee: What about like additions and that kind of thing?

Brian Davis: Those are capital improvements. So in capital, improvements are depreciated just like the cost of the building itself over 7 and a half years.

Deni Supplee: Good old half there. I love that they make it more confusing

Brian Davis: The IRS.

Deni Supplee: Oh, sorry.

Brian Davis: Oh, so Sam Deep says, ”do we have a drafted line on contractors to claim tax deductions or depreciation on repairs and improvements? So if you pay them more than $600,00 for the entire year, for the calendar year, then yes, you should be sending them 10 minutes by law. Then you do need to add on that particular point before they even start.

Deni Supplee: I would get there W.

Brian Davis: I always get nine nine like four to nine, because often you’ll have them start and then you’ll ask and they’ll put you off and put you off and then you’re in a really precarious situation.

Deni Supplee: So you want to make sure and get that information.

Brian Davis: Yeah, they don’t like to give this stuff to you. For one thing, as their personal details like Social Security numbers, people get, you know, a little twitchy about giving up and don’t want to receive them. And they would just as soon sweep that under the rug and pretend that they didn’t get that income when the IRS comes calling.

Brian Davis: By the way, I did a link here in the comments to our free rental property depreciation calculator so you can run the numbers on how much you can depreciate each year for capital improvements or for property in general. Now, you know, we touched on maintenance when to go, by the way, maintenance costs and repair costs, those are deductible this year, the entire cost deductible for this year. So those are another thing that you can wrap up before the end of the year if you want to deduct them on your taxes for next year.

Deni Supplee: Absolutely. And it’s important to keep all your receipts, all of that stuff. I mean, most people know that anyway, but sometimes if it costs not much, you tend to like not worry about it, but it adds up.

Brian Davis: Yeah. And if you’re ever audited, you’re going to need to produce that documentation or else the IRS may decide not to let you take that deduction. And they so the not only tax you want it, but they can hit you with penalties.

Deni Supplee: Penalties. Yes. Good. All audits. So, Brian, talk to us a little bit about harvesting losses. How to how can we offset some of those?

Brian Davis: Yeah. So when you sell an asset for a gain, the IRS taxes you with the capital gains tax rate for that profit that you made on it. You can offset those taxable gains by with losses, you know, so if you sell an asset and take a loss on it, then those losses can offset your capital gains that you’re taxed on. Now, you don’t want to intentionally go out and lose money, right? But if you do have some investments in your portfolio that you’ve been meaning to sell anyway, they’ve been underperforming for you that you consider like losers in your portfolio.

Brian Davis: You know, in a year when you do have some gains that are going to be taxed, you can harvest those losses by just taking the loss, you know, as they say, cutting your losses on it and then reinvesting the money somewhere else that’s going to perform better for you. There’s no reason to hold on year after year after year to these loser investments that are just not performing for you.

Brian Davis: So, for example, if you have some stocks that just have not gone the way that you thought they were going to go and they keep underperforming the rest of the market, then just cut your losses, sell them and you can take those losses that you incurred and use them to offset your capital gains from real estate.

Brian Davis: And we do have we’ve got a link here. If you want more information about either harvesting losses or about other ways to offset capital gains taxes, we’ll put a link to that in the other comments as well here. Now, one of the thing that you can do to to have some deductions here by the end of the year is to buy a property before the end of the year. So if you have if you’re in the process of buying a property, obviously we’re getting close to the end of the year here. But yeah, right. But, you know, real estate investors, a lot of them move fast. Right. That’s how they get such good deals. Yeah.

Brian Davis: If you can settle before the end of the year, then some of those closing costs that you incur are deductible for this year. The remainder of those closing costs are depreciable over the twenty seven and a half years, along with the cost of the building itself, can also be depreciated, including you can prorate the depreciation for that building for this year as well. So you do get some deductions there if you buy property before the end of this year, something to consider. And if you are selling a property this year, if you have sold the property this year, you can do it 1031 exchange. Right now, 1031 exchanges get a little tricky and a little complicated.

Brian Davis: You do have to declare your replacement property that you’re going to to buy to replace the old property you sold. You have to declare that within forty five days of selling the old property and then you also have to settle on a new plan. So when you do a 1031 exchange, you say we’re bouncing around a little bit here. You have to use a qualified intermediary to hold your profits and to to oversee the transaction for you or really both transactions, because 1031 exchanged is a swap.

Brian Davis: So you’re you’re selling one property, you’re buying another. So there’s two transactions here.

Brian Davis: The intermediary oversees those two transactions and they actually hold your profits for you so that you never actually touch those profits. So you have to declare to the intermediary and to the IRS what property you’re going to buy to replace the old property that you sold. You have to declare that within forty five days of selling now, the IRS does recognize that sometimes things happen in real estate investing and sometimes deals fall through the cracks.

Brian Davis: So they let you specify up to 3 different replacement properties. You will need to settle on one of them, of course, but you can specify up to three properties that are your possible properties that you’re going to replace your home with. And then you also there’s a second timeline here. Within 180 days of selling your property, you have to settle on the new one in order to qualify. And if you’re not familiar with thirty one exchanges and this all is Greek to you, it lets you defer capital gains taxes on your investment properties. So quick example, you buy a small single family rental that only cash flows like $20 a month, whatever you own it for a few years.

Brian Davis: You make some some cash flow, you get some equity in it and you turn around or you sell it and you want to take your proceeds from that property and roll them into a larger property, maybe like a triplex or quad plus. And you don’t have to pay taxes on your profits from the sale of property if you roll those profits into a new property and no investment property. So you can keep doing that to keep swapping out your properties and upgrading them over the entire course of your career if you want, and never pay capital gains taxes until the day that you sell a property and don’t roll the profits into a new investment property.

Deni Supplee: I’m sure there are financial professionals or accountants that can help you set all of this up, because it sounds like a lot of juggling and time, you know, limitations.

Brian Davis: Yes, you do want to speak with either a tax attorney or an accountant, about ten thirty one exchanges before doing one. And you will need to bring in a qualified intermediary, which does not have to be a professional. They don’t be licensed or anything, but they can’t be you and they can’t be your immediate family member. And they can’t be someone who’s already serving as your agent, such as a realtor or an attorney, property manager, someone who is already working for you and some sort of agent capacity.

Deni Supplee: Is somebody completely neutral?

Brian Davis: Yeah, and we do have an article that actually we just put out about ten thirty one exchanges, put a link to that in the comments as well. If you want to learn more about 1031 exchanges and how they work. Moving on, you can also make charitable deductions. Right. Either cash or you can actually donate an entire property to charity if you’re really feeling generous. But you keep this in mind that if you make a charitable donation and whether it’s cash or property or car or whatever it is, it’s only deductible if you itemize your deductions.

Brian Davis: If you take the standard deduction, then it’s not really going to help you unless unless and here’s where it helps to be a real estate investor and to have a business, you can make these charitable contributions through your business. And still take the standard deduction, because if you make these if you make these contributions or donations to your business, then that comes off your business’s bottom line and becomes deductible as an expense as opposed to your personal personal donations, then you have to itemized deductions if you want to actually take advantage of that. Right.

Brian Davis: So something to consider? Well, absolutely. Absolutely. And of course, charitable donations are also taxed. So you don’t pay any taxes on the profits on you that if you donate property. So keep that in mind. You can also prepay your bills.

Brian Davis: So, for example, if you have mortgage payments for January coming up, which if you have a mortgage and you do, you can you can make your January payment early and deduct the interest on that. Of course, that means one less interest payment next year that you can deduct. So but, you know, if you’re if you made extra money this year and you think your taxes are going to be higher this year than usual, higher than next year, then you may want to take some of these deductions early, take them this year instead of next year.

Brian Davis: So you can also you can use tax credits like, for example, the American Opportunity Tax Credit you can take for students. If you’re helping them with their tuition, you can take that. And again, tax credit better than abduction tax credit comes right off of your tax bill. You can take the American Opportunity Tax Credit, for example, for twenty five hundred dollars a year for each qualifying student. So this is helpful. Yes. So you can you can prepay some of these bills like mortgages or prepaid tuition and potentially take advantage of either the deductions or even a tax credit.

Brian Davis: You can also you should also review your medical bills at the end of this year in case you want to deduct for your medical expenses. In order to deduct medical expenses, they do have to be at least 10% of your adjusted gross income for you to deduct them. So keep that in mind. And I think you have to itemized deductions in order to take advantage of that, right? Yeah. So but yeah, you know, as you look back over this year, look at those end. If there is a medical procedure that you’ve been thinking about getting and maybe putting off, that might if that would put you over that line, that threshold of 10% of your adjusted gross income, maybe it’s worth squeezing it in this year so you can deduct those expenses. I mean, I’m just throwing ideas out there, don’t it sense?

Deni Supplee: I mean, in a lot of ways, like if you have deductibles and stuff in your you’re entering into a new year and you want to get some stuff done, it’s it’s a double whammy. You can meet your deductible before the next year and having to start over and get a tax benefit.

Brian Davis: That’s right. And potentially have better health if you know how there is that. So, you know, lastly, now it’s a great time to contribute to your tax sheltered accounts.

Brian Davis: That could be retirement accounts like your IRA or your employer sponsored retirement account. Like a 401k could be education. Accounts like a 529 plan or an ESA could be an HSA, a health savings account, which, by the way, offers the best tax benefits of any tax sheltered account. Not only can you deduct your contributions, but you don’t pay any taxes on the withdrawals either if they’re used for medical, right? That’s right.

Brian Davis: But they actually allow a very generous definition of medical expenses. So would say and when you can also use an HSA as a as a duplicate or another retirement account, because I guarantee you in retirement you’re going to have medical expenses, high medical expenses, and that money has to come from somewhere. Right. So it could either come out of your own pocket or it could come out of your HSA. So HSA is double as a retirement vehicle as well. Then what? Do we miss that? Did I miss anything here? Is there anything you want to add?

Deni Supplee: No, you did really good there. I learned to I love these things because I learned to.

Brian Davis: Well, keep them. I guess I’m not a tax expert. So, you know, before, these are really just ideas to get you thinking you should really speak with like that. He said an accountant or a tax attorney before you take one of these and run with it.

Deni Supplee: So I just let us know if you have any ideas that we can offer to, you know, people who read the blog and whatnot that help them. That’s what it’s all about, helping each other. And there are a lot of little tips and tricks.

Brian Davis: Yeah. So, you know, a lot of these are tax tips and we’ll certainly be talking a lot more about taxes over the next month or so as it’s that time. But yes, some of them are also just general financial cleanup. So, all right, well, then if there’s anything else you want to add, then we will. We’ll see you guys next week at 2:00 Eastern, 11:00 a.m. Pacific. And let us know what you want to hear about. Again, these are we do these for you not not to sit here and talk to each other. So let us know what topics you might hear my messages at us on our Facebook page or support it, spark or support that spark and all that up to email us. And we’ll see you next week at a Tuesday at 2:00 Eastern, 11:00 a.m. Pacific. Have a go.

Deni Supplee: Yes. Bye bye.

Brian Davis: Did you know we offer a free 8 video course on how to reach financial independence with real estate? It’s super bendable with each video around 10 minutes long, but packed with information. Visit SparkRental.com/learn for instant access. And please don’t forget to rate and review our podcast on iTunes Stitcher wherever you listen. Thanks for joini ng us. And we will catch you on the flip side.

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