Managing taxes can be a complex and daunting task for commercial real estate investors. In addition to the many tax forms you must supply, keeping up with changing tax laws is challenging.
That said, understanding the tax code and taking advantage of deductions will increase your returns and minimize your liability. Whether you’re a seasoned investor or just getting started, here are seven real estate tax tips to help you keep more cash in your pocket while staying compliant.
1. Track Your Expenses
Tracking your expenses is the best way to ensure you don’t miss any potential benefits. Organization from the outset is critical. Of course, this is easier said than done. A paper trail of receipts and loose notes will probably become a headache.
Consider tracking your finances with the assistance of technology. Many accounting and even real estate-specific software providers can make it easy to keep an eye on your finances throughout the year. That way, when it comes time to file your taxes, everything you need is digital and easy to access.
2. Go Green
One of real estate owners’ most overlooked real estate tax tips pertains to environmentally friendly features. When it comes to residential properties, this is usually in the form of green appliances, but commercial spaces provide some of the same opportunities.
Is it time to replace your HVAC system? There are tax breaks for choosing energy-efficient items. Additionally, installing solar panels is another investment that can give you some tax benefit. Consider going green when it’s time to make a replacement, and you may reap the rewards for years to come.
3. Take Advantage of Depreciation
Property depreciation can also be subtracted from your taxable income. Instead of taking one large deduction when you buy a property, the depreciation occurs throughout the “useful life” of the property.
The IRS lays out the following conditions for depreciation:
- You’re the owner of the property
- You use it for your business or income-producing activity
- The property has a determinable useful life, meaning it wears out, decays, gets used up, becomes obsolete, or eventually loses value from natural causes
- You expect the property to last more than one year. It must have a useful life extending substantially beyond the year a business places it in service
- Land is exempt because it does not depreciate.You must determine your land’s value and subtract it from your overall cost
According to the IRS timetable, residential properties have a lifespan of 27.5 years, and commercial properties have a lifespan of 39 years. That means you can continue to depreciate for this time or until you remove the property from service.
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