Real Estate Professional Tax Benefits: 8 Critical Write-Offs

When it comes to how to reduce your real estate taxes, write-offs are a real estate investor’s best friend. Luckily, real estate professional tax benefits are some of the best out of all the professions. The write-offs are seemingly endless and expansive (even your office equipment’s taxes count!) Learn below to uncover what counts as write-offs.

Main Takeaways

• The top 7 types of write-offs include the 20% passive income tax cut, real estate deduction cuts, property depreciation, capital gains taxes, the 1031 exchange, self-employment/FICA tax cuts, opportunity zones, and tax-deferred retirement accounts.

Table of Contents

• 20% Passive Income Tax Cut
• Real Estate Deduction Write-Offs
• Property Depreciation
• Capital Gains Rates
• The 1031 Exchange
• Self-Employment/FICA Tax Deductions
• Opportunity Zones
• Tax-Deferred Retirement Accounts

The 20% Passive Income Tax Cut 

Until 2025, certain business owners can earn a pass-through deduction from the Tax Cuts and Jobs Act. With a pass-through deduction, you can deduct 20% of the taxes from qualifying business income sources.

These write-offs apply when you use a sole proprietorship, real estate partnership, LLC, or S corp. for your real estate dealings.

Real Estate Deduction (RED) Write-Offs

Real estate deductions are perhaps the top, premier real estate professional tax benefits available. As long as something is strictly necessary to run your business, it can count as a business expense. As property managers in North Virginia, we always tell our clients to take write-offs on:

• Property taxes
• Insurance costs
• Mortgage interest payments
• Property management costs
• Building Repairs and Maintenance
• Home Offices
• Office Equipment
• Marketing
• Traveling costs
• Legal and accounting costs

In summary, you can deduct most of your everyday property-related expenses. What’s more, you can shave the taxes off your business-starting costs, like advertising in magazines. The expenses you can reduce are so numerous that you could consider your real estate investment a tax shelter.

You or your property manager will have to do these tasks anyway, so you might as well benefit from it.

To ensure you take full advantage of these write-offs, you should meticulously record all your relevant expenses. Furthermore, if the IRS audits you, they will ask for evidence of your deductions.

Also, note that you can’t receive write-offs from a property that’s not in your own name. You can’t subtract taxes you haven’t yet paid, either.

In addition, you cannot deduct assessments, such as assessments of your sidewalks or streets, transfer taxes, or service taxes, such as water and trash services. This is one misconception people frequently make.

Property Depreciation

In terms of real estate professional tax benefits, another core one is taxable income-based property depreciation. In other words, as buildings naturally deteriorate over time, your taxes will be gradually reduced.

Every year that passes when you own a property, you can take a depreciation cut. You can divide the building’s value by how long it has existed. For example, if your commercial building has a $500,000 value and has existed for 39 years, you can divide $500,000 by 39. Then, you can garner an annual depreciation deduction of $12,820.

To clarify, the IRS timetable dictates how long you’ll gain your depreciation. Residential properties’ lifespan is 27.5 years, and commercial properties’ lifespan is 39 years. The IRS will count your depreciation as a net loss, no matter the property’s cash flow.

Three factors will decide the amount of your depreciation deduction write-offs.

• How much the property is worth
• The property’s recovery period
• The depreciation method you use (most investors use the Modified Accelerated Cost Recovery System method)

Capital Gains Rates

Real estate investors receive short-term and long-term capital gain taxes when they sell properties and profit from them.

While you cannot count short-term capital gain taxes as write-offs, you can earn benefits on long-term ones.

However, long-term capital gains can grant you real estate professional tax benefits. Their tax rates are lower than short-term gain rates. Furthermore, they don’t qualify as normal income. So, depending on your income bracket, your profit will fall under either the 0%, 15%, or 20% tax brackets.

For reference, short-term capital gains refer to assets you have for under 12 months. On the other hand, long-term capital gains refer to profits you earn when you sell 1+ year long-held assets.

The 1031 Exchange

You can defer your investment property’s real estate taxes when you use its sale earnings to buy a property of the same or greater value.

1031 exchanges require that your investment properties meet certain standards:

• Your replacement property’s value must be the same, or bigger than, your initial property.
• You must exchange the properties in the transaction for an asset like a real estate investment trust.
• A third party should hold the replacement property for trade or business-related purposes.

Self-Employment/FICA Tax Deductions

FICA taxes rack up to 15.3% of your income when you are self-employed. However, self-employment taxes let you deduct taxes on your rental properties’ income.

So, in terms of how to reduce your real estate taxes, these laws combined can be a boon. When you are self-employed from rental income, you can offset your FICA (Federal Insurance Contributions Act) taxes.

Opportunity Zones

In 2018, the Tax Cuts and Jobs Act carved out 8,700 opportunity zones for real estate investors. When real estate sellers invest in properties in economically disadvantaged communities (“opportunity zones”), they can experience extensive tax benefits.

These real estate professional tax benefits come in the form of an opportunity zone fund. Namely, you can place your investment property capital gains into the fund. Then, after this placement, you can defer your original investment’s capital gains taxes. Or, they could even count as write-offs in certain circumstances.

Tax-Deferred Retirement Accounts

Certain health savings accounts (HSA) and individual retirement accounts (IRA) allow you to defer your account’s taxes when you purchase real estate. This benefit will last until you withdraw from the account.

Still, you should note that some investment types’ contributions are restricted or limited when you have certain accounts. So, you should always double-check to see if your accounts fall under this umbrella.

Time Is Money…Save It with BMG

In terms of how to reduce your tax benefits, real estate professional tax benefits can be a centerpiece of your savings strategy. Real estate deductions, opportunity zones, and other programs can give you write-offs to spend elsewhere.

Real estate professionals don’t just have to worry about taxes. Unfortunately, they can lose out on financial gains if they’re bogged down by administrative housekeeping. However, there’s a way out of the endless paperwork, maintenance coordination, and other nuisances. You can take advantage of property management services to shoulder these burdens. Call us today to make your business more efficient and effective.