For actual property traders, the finish of the yr isn’t nearly closing offers—it’s about making good strikes that would prevent hundreds in your tax invoice. When you don’t plan forward, you may miss out on crucial tax advantages that would in any other case be reinvested into your portfolio.
You possibly can take management by implementing a number of easy methods earlier than Dec. 31 to make sure you’re minimizing your 2024 tax legal responsibility and setting your self up for a stronger monetary future. Right here’s a information to the simplest tax-saving strikes, particularly for mid-income traders, which you can make earlier than year-end.
1. Take Benefit of Accelerated Depreciation
Depreciation is without doubt one of the largest tax benefits actual property traders have. When you personal a rental property and haven’t completed a value segregation (value seg) research, now could be a very good time to think about it. A price seg research breaks down your property into parts (like home equipment or fixtures) that may be depreciated quicker, resulting in bigger tax deductions within the early years of possession.
Even if you happen to don’t end the price seg research by Dec. 31, closing on the property earlier than year-end nonetheless qualifies you for these advantages if you file your 2024 return.
Don’t personal property but? You possibly can nonetheless profit by investing in actual property offers that plan to do a price seg research. If the deal closes by the tip of the yr, you possibly can make the most of the accelerated depreciation.
Take motion
Discuss to your CPA about beginning a price seg research or discover actual property fairness offers that may shut earlier than the yr ends.
2. Execute a 1031 Change
When you’re promoting a property this yr, a 1031 change allows you to defer capital features taxes by reinvesting the sale proceeds into one other property. This will help you keep away from a big tax invoice and hold your cash working for you in a brand new funding.
Let’s say you promote a rental property for a $100,000 achieve. With out a 1031 change, you could possibly be dealing with as much as $20,000 in capital features taxes. By reinvesting in one other property by way of a 1031 change, you possibly can defer these taxes and hold that $20,000 working for you in a brand new funding.
To qualify, you could determine a substitute property inside 45 days and shut inside 180 days.
Take motion
Discuss to your CPA about whether or not a 1031 change is proper for you earlier than promoting your property.
3. Prepay Bills
A straightforward technique to cut back your taxable revenue is to prepay bills in your rental property. Paying property taxes, insurance coverage premiums or making obligatory repairs earlier than the yr ends means that you can declare these deductions for 2024. This technique is particularly helpful if you happen to’ve had a higher-income yr and need to maximize your deductions.
Take motion
Overview upcoming bills, and prepay them earlier than Dec. 31 to learn from the deduction this yr.
4. Use the Certified Enterprise Earnings (QBI) Deduction
When you personal actual property by way of an LLC, S-Corp, and even as a sole proprietor, chances are you’ll qualify for the Certified Enterprise Earnings (QBI) deduction. This deduction means that you can cut back your taxable revenue by as much as 20% of your certified enterprise revenue. Eligibility is dependent upon your revenue stage, so verify along with your CPA to see if you happen to qualify for this deduction.
Take motion
Seek the advice of along with your CPA about whether or not your actual property enterprise qualifies for the QBI deduction and the way you possibly can profit from it.
5. Shift Earnings to Your Youngsters
You probably have kids, you possibly can cut back your tax burden by shifting revenue to them, particularly in the event that they’re in a decrease tax bracket. For 2024, kids can earn as much as $14,000 with out paying federal revenue taxes.
You possibly can pay your children to assist with duties in your actual property enterprise, akin to managing paperwork, advertising, or property upkeep. These wages are a deductible enterprise expense, which lowers your taxable revenue.
Bonus: When you personal a sole proprietorship or single-member LLC, you don’t should pay Social Safety and Medicare (FICA) taxes on wages paid to kids underneath 18. You too can contribute their earned revenue to a Roth IRA to jump-start on retirement financial savings.
Take motion
Set up a system to pay your kids for his or her work earlier than year-end, and seek the advice of your CPA to make sure compliance with tax guidelines.
6. Maximize Your HSA Contributions
You probably have a high-deductible well being plan (HDHP), contributing to a well being financial savings account (HSA) is a easy but highly effective technique to cut back your taxable revenue. HSAs provide triple tax advantages:
- Contributions are tax-deductible.
- Earnings develop tax-free.
- Withdrawals for certified medical bills are additionally tax-free.
For 2024, you possibly can contribute as much as $4,150 as a person or $8,300 as a household, with a further $1,000 catch-up contribution for these 55 and older. You too can make investments HSA funds, permitting them to develop tax-free over time.
Take motion
Max out your HSA contributions by Dec. 31 to cut back your taxable revenue for this yr.
7. Max Out Your FSA Contributions
Contributing to a versatile spending account (FSA) is one other technique to save on taxes. FSAs let you put aside pre-tax {dollars} for certified bills.
There are two foremost sorts: medical FSAs and dependent care FSAs. Right here’s how they work and the contribution limits for every in 2024:
Medical FSAs
- Contribution Restrict: For 2024, you possibly can contribute as much as $3,200 to a medical FSA.
- Eligible Bills: Medical FSAs can be utilized for certified medical bills like physician’s visits, prescriptions, dental work, imaginative and prescient care, and different healthcare-related bills.
- Restrictions with HSA: You can’t contribute to each a well being financial savings account (HSA) and a medical FSA in the identical yr if you happen to are utilizing a high-deductible well being plan (HDHP). Nevertheless, you should use a limited-purpose FSA (for dental and imaginative and prescient solely) alongside an HSA.
Dependent care FSA (FSA DC)
- Contribution Restrict: The contribution restrict for dependent care FSA is $5,000 per family (or $2,500 if married submitting individually).
- Eligible Bills: Dependent care FSAs cowl bills associated to the care of a kid underneath age 13, a partner with disabilities, or an aged father or mother, together with daycare, preschool, or in-home care.
- Can You Contribute to Each? Sure, you possibly can contribute to each a medical FSA and a dependent care FSA in the identical yr, as they cowl various kinds of bills and have separate contribution limits.
Necessary guidelines
FSAs function underneath a “use-it-or-lose-it” rule, that means any unused funds on the finish of the yr could also be forfeited, until your plan affords a grace interval or a restricted rollover. Make sure you overview your medical and dependent care wants for the rest of the yr and use any remaining FSA {dollars}.
Take motion
Maximize your tax financial savings by reviewing each your medical and dependent care FSAs, guaranteeing you’ve contributed to and used them correctly earlier than the yr ends. When you’re contemplating contributing to an HSA, make sure you’re not contributing to a normal medical FSA to keep away from eligibility conflicts.
8. Harvest Capital Losses
If any of your properties or different investments have misplaced worth this yr, you possibly can harvest capital losses to offset features elsewhere in your portfolio. This helps cut back your total taxable revenue for the yr.
When you promote an asset at a $20,000 loss and have a $20,000 achieve from one other funding, your losses and features cancel one another out, that means no taxable achieve. In case your losses exceed your features, you possibly can offset as much as $3,000 of odd revenue and carry over any remaining losses to future years.
Take motion
Overview your portfolio for underperforming investments you possibly can promote earlier than Dec. 31 to learn from this technique.
9. Discuss to Your Accountant About Tax Credit
Tax credit instantly cut back how a lot you owe in taxes, making them notably invaluable for mid-income traders. Listed below are some key credit to think about:
- Little one Tax Credit score: You probably have kids, this credit score can cut back your tax legal responsibility by as much as $2,000 per qualifying baby.
- Saver’s Credit score: When you contribute to a retirement plan, akin to an IRA or 401(ok), and your revenue falls under sure limits, chances are you’ll be eligible for the Saver’s Credit score. This offers as much as $1,000 (or $2,000 for married {couples} submitting collectively) as a direct credit score to your taxes.
- American Alternative Tax Credit score: When you or your dependents are paying for school, this credit score may give you as much as $2,500 per yr for eligible training bills.
These credit are sometimes essentially the most related for mid-income earners, as they apply to frequent life conditions like elevating kids, saving for retirement, or paying for training.
Extra credit to think about
Whereas these credit are tailor-made to typical mid-income tax conditions, you may nonetheless profit from these extra credit, particularly if you happen to’re making bigger investments:
- Residential Vitality Credit score: When you’ve put in renewable power methods akin to photo voltaic panels or wind generators in your property, this credit score will help decrease your tax invoice.
- Electrical Automobile (EV) Credit score: When you bought an electrical automobile this yr, you could possibly qualify for as much as $7,500 for a brand new EV or $4,000 for a used EV.
- Alternative Zone Credit score: Investing in alternative zones can let you defer or cut back capital features taxes, making this a helpful credit score if you happen to’re concerned in bigger actual property or enterprise growth initiatives.
Take motion
Work along with your CPA to determine which credit apply to your scenario and make sure you’re maximizing your tax financial savings for 2024.
10. Charitable Donations
Donating to a professional charity is an effective way to provide again and cut back your taxes on the similar time. You possibly can donate money or appreciated belongings, akin to shares or actual property, and obtain a tax deduction based mostly on the truthful market worth of the asset.
Take motion
Make any charitable donations earlier than Dec. 31 to get the tax deduction for this yr.
11. Contribute to an IRA
Whereas there are a number of methods it is best to pursue first, contributing to a person retirement account (IRA) is a viable technique to cut back your tax legal responsibility. Contributions to a conventional IRA are tax-deductible, which lowers your taxable revenue for the yr. Nevertheless, it’s essential to do not forget that this technique defers your revenue, locking it up in a government-controlled belief account till retirement.
For 2024, you possibly can contribute as much as $6,500 to an IRA (or $7,500 if you happen to’re 50 or older). You may additionally need to contemplate a Roth IRA, which doesn’t present a right away tax deduction however permits for tax-free withdrawals in retirement.
Whereas this technique will help cut back your tax burden, it’s value contemplating how locking up your revenue till retirement suits into your total monetary technique.
Take motion
If contributing to an IRA suits your long-term objectives, make sure you make your contributions by the tax submitting deadline to cut back your taxable revenue for 2024.
Closing Ideas
By implementing these end-of-year tax methods, you possibly can considerably cut back your 2024 tax burden and hold extra of your hard-earned cash. Whether or not it’s profiting from accelerated depreciation, maximizing your HSA or FSA contributions, or contributing to an IRA, every step could make a significant distinction in how a lot you owe. It’s additionally important to think about how tax credit, charitable donations, and long-term funding methods like 1031 exchanges can additional improve your monetary place.
The secret is to behave earlier than the Dec. 31 deadline. Don’t wait till it’s too late—communicate along with your CPA, overview your choices, and make the precise strikes to make sure you’re taking full benefit of all obtainable tax financial savings. By being proactive, you’ll not solely decrease your taxes now but additionally lay the groundwork for smarter monetary selections and stronger wealth-building sooner or later.
Be aware By BiggerPockets: These are opinions written by the writer and don’t essentially symbolize the opinions of BiggerPockets.
