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505 14th Street Suite 918 Oakland, CA 94612

29 NOV

Real Estate Tax Tips to Optimize Your Investment: Part 1

by Codeaccounting

Home is more than where the heart is: it’s possibly your most valuable investment. You put a lot of thought into choosing it, whether it is where you are raising a family, or it’s a rental property bringing in a steady income. In this two-part series, we go over some essential tax codes related to real estate. Knowing these can help you reduce your tax liability and optimize the value of your real estate.

Section 121 Exchange

We’ve written about our Section 121 Exclusion in the past. You can catch that blog post here, but to provide an executive summary, a primary residence makes you eligible for thousands of dollars in tax savings. Like we outlined in the post, for your home to be eligible for a Section 121 Exclusion, you have to have lived in the home as your primary residence for two out of the past five years.

Rental Property and Business Expenses

Many have invested in real estate as a source income, renting out their properties to tenants. Like with any business, the expenses associated with your property can be deducted as businesses expenses. This includes mortgage interest, repairs and maintenance, even printing costs.

1031 Exchanges

This is another one we’ve written about in the past. If you’ve invested in property (and it’s not your primary residence), sold it, and made a gain, you’re liable to taxes on those gains as earned income. But if you’re looking to reinvest that money right away, you can bypass that lax liability altogether. That’s what a 1031 Exchange is (named after the tax code that stipulates it). Keep in mind there are several requirements for a 1031 Exchange related to timing, and you cannot touch any of the gains or they’ll immediately become taxable. For a more comprehensive outline of a 1031 Exchange, check out our previous post.

Rental Property Income is Not Liable under FICA

The gig economy is growing, so more and more people are making sure they understand how self-employment is taxed in order to comply with tax law. But the profit you make from renting our property is not liable under self-employment tax law. FICA stands for Federal Insurance Contributions Act, and makes you liable for the full amount of the 15.3% amount that would normally be split between you and an employer if you were working for someone else. While that full percentage is owed by freelancers, it currently generally does not apply to property owners renting out property. Notice the word “generally”; there are some actions that make you liable for a FICA tax, like paying yourself a formal salary.

Home Mortgage Interest Deductions for 1st and 2nd Properties

Your home mortgage can help you save a significant amount of money on your yearly taxes. You can deduct 100% of your mortgage interest from your taxes every year, from your primary and second home. There is a dollar limit of $1.1 million in total mortgage for both homes combined, and you can’t deduct on more than two homes.

Home office deductions

Some people use their home as a part of their business. This comes with its own tax benefits. As of 2013, the IRS has a new, simpler way of computing the home office deduction. The most important requirement to be able to take advantage of this deduction is that your business must be of regular and exclusive use, and must be the principal place of your business.

 

Stay tuned for part two, where we discussed two slightly more complex pieces of Real Estate tax scenarios: seller financing in an installment sale, and passive vs. non-passive section 1231 exchanges. In the meantime, if you have any questions about what you’ve read here, and would like to know more about how to take advantage of these tips and maximize your real estate investments, don’t hesitate to reach out to us at Code Accounting.

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