The Secret Tax Advantages Every Property Investor Should Know

Understand the tax benefits of real estate investing and how you can maximize your returns by taking advantage of deductions, depreciation, and other tax-saving strategies in real estate.

Unlock the secrets to keeping more cash in your pocket with our real estate tax tactics. This episode we dive into property depreciation, including the tantalizing option of bonus depreciation.  So if your rental property dreams haven't factored in the tax perks, it's time to listen up and let your wallet thank you later.

Remember, the tax road can be winding—always best traveled with expert guides like tax experts.

Episodes mentioned:
Tax Planning & Strategy with Sugey Piedra

Transcript

Speaker 1: 0:02

Welcome to the Money Chisme Podcast, a fun and safe space for personal finance, investing and entrepreneurship tips, where we get the chisme on all things money with sass and humor. I am your host, violeta, a first generation Mexican immigrant, a real estate investor, entrepreneur, and I am here to help you kick ass in the financial game. Each week, I not only bring you expert tips, but also share the financial freedom and entrepreneurship journeys from our own community, because you know, representation is important. So grab un cafecito or, si quieres, an adult beverage and let's get into this week's money chisme. Hola, hola. Welcome to another episode of the money chisme podcast.

Speaker 1: 0:57

So tax season is technically over. The deadline has passed and you know one I want to say I'm proud because I actually got my taxes done on time this year. Last year I had to wait for some documents that took forever and I ended up having to get an extension, and this year I only had one document that I had to wait for and I managed to get it like two weeks ago, and I was able to get it in there and still make the deadlines Now, even though the tax season is over, now is the perfect time to start planning and creating a strategy for next year and I did, you know, talk about you know tax planning and strategy with a guest that I had on the Money Cheesement podcast and her name is Suge, and I will link that episode down below. But I want to focus mainly on the benefits, the tax benefits of real estate investing, that some of these I was able to use from my rental properties that helped bring things that came up, some lessons learned that you know I will talk in a future you know video episode. I definitely was able to still take advantage of lots of these benefits and actually this year I was able to get a refund and last year I didn't. I had to pay Um, but you know I was able to claim a lot of these losses that brought my tax liability, plus some other things that she found, um, not necessarily related to real estate investing, Um, but, um, she managed to find other things that I could, you know, deduct or claim in credit. So that way I could actually get a refund this year and so that was nice.

Speaker 1: 3:09

So when people think of investing in real estate, you know they kind of focus on like two, maybe three main goals and that is, of course, making you know money in either the form of cashflow or, you know, flipping a property. But they also think about the appreciation now how much is this property going to be worth in the future? But a lot of the things that are not included and talked about as much or considered when people get into real estate investing, especially me. I definitely didn't think about the tax benefits when I got into real estate investing, but once I bought, like my second duplex, I started learning more about the tax benefits and that is something that people need to, you know, take into account because it's actual. You know money as well, because by reducing your tax liability, that's money in your pocket, that's money that's not going out. So that's still a form of a benefit of real estate investing.

Speaker 1: 4:17

So the first tax benefit with real estate investing is the ability to depreciate your property, and there's two different options with depreciation. The first one is depreciation of the property itself, the home, because over time, the IRS sees this as an asset that is going to lose value because of the wear and tear of the home, from using it as a rental property. And even though a lot of these properties are increasing in value through appreciation, the IRS doesn't take that into account because of course, the market can go up and down and so you're able to depreciate your home, your property, um over a period of about 27.5 years. Now the way that depreciation works is, again, you're able to take um, depreciate your house of, you know, because of the wear and tear, over a span of 27.5 years. Now the thing is it does not include the land, it only includes the property itself. So when you get that first tax bill of when you buy your property and you get the assessed value of your property, it's going to split it into the land assessed value and then on the added improvements, which is like the property itself. So you're going to use the property itself, what they valued it, as to calculate how much you can depreciate each year. And so let's say you had a property that after you remove the land value, it comes out to, let's say, 100k. You're going to essentially be able to depreciate about $3,600 and some change dollars each year. So that's a tax benefit, that's a deduction each year that you have already with your rental properties. So off the bat, you're already having a deduction of $3,600 to reduce your tax liability.

Speaker 1: 6:48

Now there is a bonus depreciation for your properties which can be taken in the same year that you put your property in service and it is just taking, instead of depreciating, some costs like, um, like capital improvements or like things. Like you know, you're buying the stove, putting floor down or whatever, like those costs. You can depreciate it, but take all that up front in the tax year that you put the service, the property in service. Now there is another depreciation that you can take when you put a rental property in service, and it's called bonus depreciation. Now, bonus depreciation is different from the regular depreciation which, know, depreciates the value of the property itself over the span of the 27.5 years. Bonus depreciation allows you to depreciate the, the cost of uh, like you know, if you had to put new hvac, you need to put a new roof or stuff like that um, those costs. You can depreciate it and take that up front instead of waiting, like the 27th, the, the time period, a long time period over time, um, you could take that up front in the tax year in which you put your property in service. And this is awesome because you can reduce your tax liability when you buy a new property. So that's an incentive to continue buying new properties because it continues to bring your tax liability each time Because you know you buy property, you're increasing your income, so that's more taxes, but now, with the bonus depreciation, you can lower that down. So it was a neat strategy.

Speaker 1: 8:50

The problem is that it is planned out to phase out. So the last um time, the last year that you can take advantage of this, is going to be 2026 and you know, each year it was, you know, established in 2022, was made available um, but it went down each year. So, like in 2022, you could depreciate, you get the bonus depreciation at a hundred percent, and then it just went, you know, down by 20% each year. So in 2024, you can depreciate 60% of your upfront costs, um, of qualifying costs, right, uh? And then 2026, it drops to 20%. So by 2027, it's gone. It's apparently in the works of hoping that it gets renewed. So until then, this year, in 2020 to 2026, you want to.

Speaker 1: 9:48

Really, you know that you are able to take deductions off of some of the costs of having this rental property. So this includes your, you know, mortgage interest deduction, so that interest that you're paying on this rental property will be used to rental property will be used to as a deduction as a cost. Because it's a cost. The IRS sees it as a business, so it is a cost of doing business. And same with, you know, property management, the repairs and maintenance, upkeep of the property. All of that is deductible and is used to lower your tax liability. So, for example, with my rental property, I was able to deduct my property manager, which is $143 per property, and so I'm able to deduct that. I'm able to deduct my interest, my mortgage interest. I'm able to deduct some of the repairs that I had to do, like I had to right now.

Speaker 1: 11:10

I started, which was kind of costly last year. Which way I was like in a negative cashflow last year because I decided to do some upgrades to the property. I am currently replacing the water heaters, fixing the HVAC system. I went and took the carpet out and put LVP. So I'm really doing these updates and, although it may seem like counterproductive, because I like, basically used up on my cash flow, it's, you know, it's messing that up, it's giving me a cost in the long term it's going to benefit me because doing these things up front well, somewhat up front, because I should have done this as soon as I bought the property Now it's going to benefit me in the future. So once I get out of the military, I don't have to worry about the water heater or anything like that, because I have everything pretty much new and you know I'm going to reduce costs of. You know, when a tenant leaves tenant turnover, I don't have to replace carpet all the time because carpet gets so easily dirty.

Speaker 1: 12:22

So I'm doing these things and all of these things I can deduct and help reduce my taxable income. So that cash flow, even though I brought in money because I had all these expenses, I was in a negative, so it reduced my tax liability, which is why I was able to actually get some of the money back, uh, this year and uh, so I still got money back, uh for my taxes and you know all that. I didn't all that uh income. I didn't really have to pay much taxes on it because of my deductions, and that money was still income that I use to help upgrade the house and, you know, make updates and just, um, uh, increase the value of that property. So, um, it's still beneficial, and so some of these things are it's still beneficial, and so some of these things are things that are overlooked when you're buying a property or when people think of a negative cashflow. The first two years I had these properties I had really great cashflow. And then last year I decided to you know what. Something started coming up, like the plumbing or whatever, and I just said you know what, I'm going to rip off the bandaid and I'm going to go ahead and fix all of this.

Speaker 1: 13:43

Now, another deduction that you can take is the property taxes. Now, I know, with rental properties you're like well, the taxes are high or whatever, and that does take. You want to take that into account with your cash flow, but you are able to deduct this with your taxes. So, for example, in areas where they have high property taxes like, for example, texas has, although they don't have like a state income tax or anything like that the property taxes are really high. So when you have a rental property there, that's, you know, cuts into your cash flow, but you are able to deduct pretty much the full amount. Um, when you do your taxes.

Speaker 1: 14:33

Another benefit with real estate is the ability to defer your taxes and you know this is done through something called 1031 exchange. So when you sell a property, you're, you know, having to pay, you know, capital gains tax. So the profit that you make of your property, you pay taxes on it, you pay capital gains taxes on it. The thing is, with the 1031 exchange, you can defer these taxes by reinvesting those that profit into another property, those that profit into another property. So, for example, right now that I have these two properties, I can eventually, once I, you know, decide maybe I want to do a different strategy or just scale up. Um, I could sell one of these and, you know, um do a 1031 exchange where I use the profits and buy a different type of property. And because I did that, I don't have to pay the taxes right then and you can do this indefinitely. You can just continue to put off paying the taxes on the profits of these properties as long as you just keep doing 1031 exchanges. And this is a pretty good benefit because you can grow your portfolio and build wealth pretty much tax-free this way, because you just keep on pushing the taxes to future you right. So, for example, my friend who sold his rental property, he had to pay those capital gains taxes, but had he reinvested that money into another property or something, he could have done a 1031 exchange and put off paying those taxes.

Speaker 1: 16:31

And the last benefit is the passive activity losses, which I kind of already briefly talked about, and that is just, you know, being able to, you know, deduct your passive losses. For example, with me last year again, I had to, you know, replace some of the water heaters. This year I'm still going through and replacing some other ones and doing some other stuff, and with this I was able to offset my rental income that I did bring in last year. And this is a great benefit because I am still bringing in money. And had I not been able to, you know, deduct these things and have this laws, then I would have had to, on top of the laws, pay taxes on this rental income, and so it would have just been like a double whammy where not only did I have a negative cash flow, now I have to pay taxes on the income that I did bring in.

Speaker 1: 17:33

And so, with the IRS, it lets you balance that out, bring in. And so, with the IRS, it lets you balance that out. And it's a great way, because I'm still, you know, upkeeping, I'm still bringing the income, and although it didn't go straight into my pocket, it went into the house, and that's still money, that for me because, even though, uh, I had to, you know, the spend the money to replace, like the water heater, fix the HVAC stuff. That's part of the house that's going into the house for my asset and it's increasing the value and at least making sure that it doesn't lose value, because I'm maintaining the home but I don't have to pay taxes on it and you're able to do this with your rental income. But there's even other added benefits if you do real estate investing, you know, kind of like full-time, which I don't want to get into it because it gets a little bit like complicated.

Speaker 1: 18:33

So for when my husband gets out in October of the military, he could just, you know, technically be the real estate manager and because of that now I'm able to deduct some of that off my W-2 income and it's like it gets really into the weeds, which I want to avoid because I'm not a tax expert, which is why I go to my tax expert to help me with these things and um, but these are the things that you want to start considering and planning for, uh, which brings me to my last point, is that, again, just to kind of drive it home is to make sure that you also consider your taxes, your tax benefits and create a tax strategy plan for these things when you are doing these transactions, when you're planning for buying a rental property. And I myself already have scheduled my appointment to do my tax strategy, my tax planning for this year, for the rest of the year and for in the future, because there's lots of things that, uh, I have going on not only with real estate investing, but, you know, with you know, money, cheeseman, I'm going to, you know, have some stuff out that is going to, you know, be bringing in income. So now I have small business, entrepreneurship, all that stuff, so, and so that's one of the things that, if you want to get into real estate investing, definitely plan for these things and learn about these things and start working on these things now. So, if you know that this year you want to buy a rental property or you want to flip a home or something like that, talks to, you know, a tax person to help you understand what the tax portion of it is going to be, it gets really complicated.

Speaker 1: 20:31

So make sure you're not trying to do this yourself, because I definitely messed up the first time, the first year I had my rental property that I made one of my houses uh well, my first home, my rental property uh, I didn't know about depreciation and I didn't find out until I went, uh, to buy another property and the lender was the one that told me that was like, hey, you didn't depreciate your property, that's because I had done it myself. So I didn't know these things. And so now, lesson learned now I have somebody, an expert, do it for me and an expert to guide me to make sure that I am strategically doing all these things to help reduce my taxable income and my taxable liability, so that way I keep more of my money that I can invest again. Other than that, that's it for this episode and I will see you in the next one. Bye. Thank you so much for listening.

Speaker 1: 21:30

Don't forget to like and share this episode so others can also find this podcast. Don't forget to follow me on all my social medias listed in the show notes below, where you can also find resources to help you in your financial journey. If you're interested in becoming a guest on the podcast, you can find that information in the show notes. Other than that, thank you so much for your support and I will see you in the next episode. Bye.