Don’t just think of tax time as a few weeks in April. Of course, you should work on tax savings all year long but the end of the year can have the most impact for investors, landlords, property owners, and vacation property owners. There are actions you want to take before December 31 that you’ll benefit from when you file in April. I’m not an accountant so check with yours regarding what you can and can’t do.
Right about this time of year you might want to refresh your memory about how last year’s tax law changes affected investors with this article: Real Estate Investor Taxes What You Need To Know.
There are no pending tax law changes that will affect your 2019 taxes the way your 2018 taxes affected at this time last year. There have been years when it made good business sense to collect as much income as possible in the last couple of months of the year because of pending tax changes in the coming year. That is not necessarily the case this year. Whether you collect pending income late this year or early next year is mostly a matter of your personal business situation. Generally, it’s still a good idea to defer taxes (based on income) into the next year when you can. So, pulling as much income into 2019 probably isn’t the best decision for most investors.
But business expenses are a different story. Expenses are almost always better to claim sooner rather than later. Typical examples of expenses that can be paid early include: equipment purchases, miscellaneous services, printing, memberships, insurance, real estate education, cell phone costs, and advertising. If you have employees, you can prepay social security, Medicare, and unemployment taxes. Of course, your biggest expense is probably the interest paid on mortgages.
Those are the most frequent tax deductions and credits but there are other tax savings tips that you might be able to influence before the end of the year. Here are the places you want to look for tax lowering expenses.
Mortgage interest: Paying a month ahead on mortgages enables interest to be written off as well as lowers the outstanding balance owed.
Depreciation: Current tax code allows you to claim depreciation on each property for 27.5 years. Claiming depreciation is a powerful tool for mitigating your overall tax burden.
Repairs and upgrades: Complete these early for a tax benefit in 2019 and so your tenants have a nicer place for the holidays. A win-win. If you had vacancies during the year, you may have deductible cleaning and utility expenses.
Mileage: Use of your own vehicles as well as any specialty vehicles that you rent or lease.
Travel: Out of state investment property travel and business conference expenses can be tax-deductible.
Home office: Space used exclusively for business. A combination office/guest room/home gym isn’t going to qualify.
Computers: Some need to upgrade computers and software as support for MS Windows 7 comes to an end in early 2020. These purchases and other equipment can be made now to reduce your 2019 tax liabilities.
Legal or professional fees.
Pending closing costs: Such as title company and lender fees.
Casualty losses: These aren’t something you plan for, but in the event of a disaster, such as a fire or a flood, the IRS allows you to write a portion off as a loss.
Any expense: Directly related to your real estate activity.
Retirement savings: Maximize your contributions to IRAs and 401K accounts. If you don’t have one, you can open one before the end of the year.
Charitable giving: There are many charitable giving opportunities that both enhance your standing in the community and lower your tax bill. Sponsoring a charitable event gets you both positive exposure and many of the costs are write-offs. You can also contribute to your own retirement through a charitable trust or just make a donation in exchange for a tax deduction.
This is only the tip of the iceberg for tax benefits that you can realize as a real estate investor. There are many others that you and your accountant need to consider. For instance, if you generated any kind of active real estate income, you should consider restructuring your business to minimize the impact of self-employment taxes.
Real estate investing offers big tax advantages. It only makes sense to talk to a tax professional who can evaluate your situation and help you determine if any year-end moves make sense for you.
Please leave a comment about what you are doing to reduce your tax liability. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].