As 2019 draws to a close, savvy real estate investors have one thing on their mind — and it’s not auld lang syne.
Those in the know realize that the end of the year is actually the ideal time to think about tax strategies. When the New Year looms, business owners have just a short window of time left in which to make moves to benefit themselves when tax day rolls around. December brings several tax deadlines that you don’t want to miss. Here are the 5 year-end tax strategies that every real estate investor should know.
1. Review Accounting Records and Projected Total Income
You already know that keeping accurate, complete accounting records is critical to your business performance. With 2019 coming to a close, now’s the perfect time to update records for each of your flip projects and rental properties. Once that’s done, you have the information you need to project your income and expenses accurately.
Why is that important? Because now is your last chance to make any needed adjustments or needed investments to balance your net income to your target level. Not only will this make your CPA’s life easier, but you can also go into tax season with less worry about unpleasant surprises.
2. Take Advantage of 401(k) Matching
Got an employer-sponsored 401(k) or 403(b)? Now might be the time to take a look at your retirement accounts.
If your employer matches your contributions, make sure that you’ve contributed the max. If not, it’s like throwing away free money. Plus, contributing up to the limit can help reduce your taxable income. For 2019, that’s $19,000, with an additional $6,000 if you’re over 50. Consult with your employer or financial advisor to make sure you reaching the best contribution levels for both your current budget and longterm goals.
3. Consider Alternative Retirement Account Options
You may also consider converting your traditional 401(k) or IRA to a Roth. While converting won’t reduce your taxable income now, you won’t pay any taxes when you take distributions in retirement. Consult with your tax advisor to see if a blend of traditional and Roth accounts can offer you the best of both worlds.
Finally, consult with your financial advisor about setting up a solo 401(k) or a self-directed IRA (SDIRA). This allows you to contribute up to $56,000 ($62,000 if you’re over 50) in business income. Just keep in mind that you can’t contribute passive income, i.e. rental income, to these types of accounts.
4. Hit the Deduction Threshold
Here’s yet another reason why it’s so important to take steps now to hit your desired income.
If you keep your taxable income below a certain threshold — for 2019, $157,500 for an individual and $315,00 for a married couple — you may claim a Qualified Business Income deduction. The QBI offers a 20 percent deduction. Unfortunately, if your taxable income rises above the threshold, not only will you lose this 20 percent QBI deduction, you may also risk a limited or eliminated business deduction based on an unadjusted basis of business property and W-2 income.
Just remember that taxable income is not the same as adjusted gross income or AGI.
5. Consider a Cost Segregation Study
Since you know your projected total income, you can make an informed decision about whether a cost segregation study will reduce your tax bill.
This tool can help accelerate your rental properties’ depreciation. It allocates purchase prices between five, seven, 15, or 27.5 years. This can help you select certain properties to depreciate over a shorter time, for increased depreciation expenses in the years following purchase. Cost segregation studies can help reduce your tax burden if you have lots of passive (rental) income. Keep in mind that studies generally cost $4,000 to $7,000, so be sure that the potential tax savings are worth the investment.
Once your taxes are in line, you can bring your focus back to growing your investment business. When you’re ready to invest in your next property, let New Western Acquisitions do the legwork. Our team will match you to off-market properties that fit your investment profile. Contact your local New Western office to see if you qualify for our investment properties.