Real estate professionals are very informed when it comes to taxes. Learning about all of the relevant tax loopholes is necessary for success in this field. When dealing with multi-million dollar portfolios, 1% can be the difference between success and bankruptcy. Read below to learn how these people use the IRS tax code to avoid nearly all taxes.
Real Estate Professionals Understand Depreciation
Real estate professionals always have tax depreciation in mind. They use depreciation in order to offset as many tax obligations as they can. When a piece of machinery or real estate depreciates in value, there is a reduction in taxes. Typically, a residential property depreciates over approximately 27 years. However, there are ways to change this for certain items on the property. For example, personal property such as ovens, boilers, stoves, etc. within a building can depreciate within 5 years. Even more, all of these are tax-deductible. For anything outside of the building such as landscaping, pools, signs, fencing, etc., the time horizon is 15 years. In other words, all of these items can bring your total tax figure down closer to zero.
Why Didn’t Anyone Tell Me?
Real estate professionals have been using it for a long time. The method is not quite a secret, but nobody is going to tell you something that you are not actively seeking
A CPA cannot perform this analysis for you, due to a lack of knowledge in the area. You need to get a cost segregation firm to calculate the costs of depreciation. That is the only thing that will satisfy the IRS. Additionally, you need to document everything; you cannot just make claims.
Of course, if you do it right, you can avoid paying any taxes to the IRS. If you are looking to join the ranks of real estate professionals, then you need to learn all about these legal loopholes.
Things that are not part of the main property are not eligible under the scheme. So, marble and tiles will not count under a 5-year depreciation scheme. However, adhesives and carpeting, as well as mirrors, chandeliers, pianos, portable air conditioners, etc. can be included under the tax code.
Remember that there is nothing wrong with avoiding taxes legally. When building or renovating, you should also give it some of your focus.