The U.S. tax code is incredibly complex, and as a result, there are many ways to save money on your taxes when it comes to real estate. Buying a real estate property itself is costly, and if you can’t save on taxes through it, you’re missing out on a big opportunity. This article will outline five of the best ways to do just that. So whether you are a homeowner or an investor, read on for some valuable tips.
Invest in Real Estate Through a 1031 Exchange
One of the best ways to save on taxes when it comes to real estate is to invest in a property through a 1031 exchange. A 1031 exchange allows you to defer paying capital gains taxes on the sale of a property as long as you reinvest the proceeds into another qualifying property. This is a potent tool for investors, allowing you to trade up to a more expensive property without paying any taxes on selling your old one.
To qualify for a 1031 exchange, you must follow a few rules. First, you must identify the property you want to exchange within 45 days of selling your old property. You then have 180 days to complete the purchase of the new property. And finally, the new property must be “like-kind” to the old one, which generally means that it must be an investment property, not a personal residence. If you are considering selling an investment property, talk to your tax advisor about whether a 1031 exchange makes sense. It could save you a significant amount in taxes.
Get the Capital Gains Tax Exclusion on Your Home Sale
If you own a home and sell it for a profit, you may be able to exclude up to $250,000 of the capital gains from your taxes ($500,000 if you are married and file a joint tax return). This is an incredibly valuable exclusion and can result in significant tax savings. You need to meet certain conditions to qualify for the gains. The condition is that you must have not only owned but also lived in the home for at least two of the five years before the sale. There are also a few other requirements, so talk to your tax advisor if you consider selling your home.
Claim Capital Allowances
Capital allowances are key tax relief for businesses that own or lease commercial property. Companies can reduce their taxable profits by claiming capital allowances, potentially saving them money. There are two capital allowances: Annual Investment Allowances (AIA) and first-year allowances (FYA).
AIA allows businesses to deduct up to £1 million of expenditure on plant and machinery from their taxable profits each year. FYA allows businesses to deduct up to 100% of the costs of certain types of plant and machinery in the year they are first used or installed.
To claim either type of allowance, businesses must keep records of their eligible expenditure. For FYA, companies must also have written confirmation from their suppliers that the equipment qualifies for the allowance.
You can also claim the capital allowance if you own multiple residential properties and are letting them for rental profit. You can hire services to claim capital allowances on residential property letting. The service providers will be in the best position to help you identify what capitals you can claim allowances for and file them to reduce taxes.
Invest in Energy-Efficient Improvements
If you own a rental property, you can save on taxes by making energy-efficient improvements. The energy-efficiency tax credit allows you to deduct up to $1,500 of the cost of qualifying improvements, such as insulation, energy-efficient windows, and certain heating and cooling systems. This tax credit is available for both existing homes and new construction, so it’s a great way to save on taxes whether you are buying a property or improving the one you already own.
Get a Mortgage Interest Deduction
If you own a property with a mortgage, you can deduct the interest you pay on loan from your taxes. This deduction is available for primary residences and investment properties and can be significant savings.
The mortgage interest deduction is capped at $1 million of debt, so if you have a large mortgage, you may be unable to deduct the full amount of interest you pay. But even a partial deduction can save you a substantial amount in taxes.
Remember, these are just a few of the many ways to save on taxes when it comes to real estate. Be sure to talk to your tax advisor about other potential tax breaks that may be available to you. With careful planning, you can minimize your tax bill and keep more of your hard-earned money.