Tax and Financial Strategies for Decatur and Atlanta Real Estate Investors
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Tax and Financial Strategies for Decatur and Atlanta Real Estate Investors
Real estate investors put a ton of money on the line with every deal. To be profitable it takes more than buying properties at a discount and selling for a profit. There are many tax and financial strategies for state of Georgia real estate investors to take advantage of. Smart planning helps investors see ways to hold properties longer and still make money. Let me preference this with I’m not a lawyer or accountant, and this is not legal or accounting advice. nor do I play an Accountant or Attorney on TV.
Personal Home to Investment
When trying to maximize every penny of gain in a property, paying high capital gains taxes on the sale of the property can eat away all other profits. A homeowner who has lived in his home for at least two years is able to exclude up to $250,000 ($500,000 for married couples) in capital gains. The IRS allows this when the home has been a personal residence for at least two of the previous five years.
This means a homeowner who later rents his own home out when he upgrades to a higher-end home can maximize all gains when he sells the property. In a rising housing market, holding the initial property allows the home to continue to appreciate and gain equity. As long as it is sold within the five-year mark for no more than $250,000 above the purchase price less any improvements, there is no capital gain on the property. It is an exempt transaction.
Leverage Debt
Mortgage lenders talk about leveraging debt all the time. It’s really a very simple strategy. Take the homeowner who rented his first house while purchasing a better personal property. If his home had appreciated in the time he owned it, he could get a home equity line of credit or second mortgage on the home and use those funds as a down payment for a new property. He has leveraged debt into a new equity position.
Tax and financial strategies are enhanced by leveraging debt. Unlike with your home mortgage interest, you can deduct all of the interest paid on your investment properties. If you had $100,000 to invest you could by 5 properties by putting down 20% vs. buying one property buying it for $100,000. In rising housing markets in Decatur, Atlanta Cascade, Sylvan Hills and Collier Heights, an investor can take advantage of several growing equity positions to obtain new investments. It is important to watch debt in these situations since you need to ensure you are not overextended should the market have a sharp decline.
Depreciation on Properties
Investors can take depreciation on tax returns and one of the financial and tax strategies that many investors aren’t aware of. Depreciation is used for the property itself on a 27.5-year schedule with some portion of the property purchase price being written off each year over the course of the schedule. Depreciation is also used for major purchases such as appliances. The IRS has depreciation schedules for the expected useful life of products. For example, putting in a new concrete driveway can be depreciated over the course of 15 years. Some depreciation schedules are as fast as three years. Let’s say you purchased a property for $150,000. Divide that by 27.5 and you will be able to write off $5,454.54 each year from your taxes. This is called a noncash expense because you can write it off, but you’re not actually using any current funds.
Depreciation is particularly useful in core investment strategies of buy and hold properties such as rentals. However, a fix and flip investor might be able to take advantage of some initial depreciation for major purchases on the property such as new appliances, carpets, and roofing.
1031 Exchange
In a “1031 exchange” (A.K.A. like kind exchange), an asset – typically real estate – is sold and the proceeds are then reinvested in a “like kind” asset. By conducting this exchange, the individual will not recognize any losses or gains as per Section 1031 of the Internal Revenue Code. Capital gains taxes are deferred until property is sold and not exchanged.
- The exchanged property must be identified within 45 days
- All proceeds of the initial sale must be re-invested in the like kind property within 180 days of that sale.
- When exchanging property, you must do so if like kind. Real property has to be exchanged with real property, not personal property.
- 1031 Exchanges can only take place with investment property, commercial property, personal property or trade property (no personal residences)
- Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
For a more indepth discussion of the tax saving advantages of a 1031 Exchange go to: Bigger Pockets 1031 Exchange Guide
Letting Go of Losers
As a real estate investment portfolio gets bigger, an investor might realize some investments are just not going to produce the desired return on investment. Just like stock strategies, sometimes it makes sense to let go of losers to offset other gains.
Losses won’t help you unless you can offset them to gains. There are short-term and long-term capital gains. Short-term gains are made on properties held less than one year at 25 percent while long-term gains are made on properties sold after one year at a 15 percent tax rate. Gains are determined by the acquisition price, costs associated with buying and rehabbing the property and any maintenance on it.
If you have a capital gain issue for the year and are holding onto a property that just isn’t performing, it might be a wise move to sell the property, take the loss, reduce this year’s tax liability and regain investable cash that you can use to buy a better investment.
If you are an investor and have a property you want to sell, send me a message or call Kevin Polite, Solid Source Realty, Inc. 678-435-9991
Additional Articles:
5 Overlooked IRS Tax Deductions for Investment Property in Decatur, Cascade Atlanta & Sylvan Hills