Providing for your income in retirement requires thoughtful planning, and real estate investments can play a pivotal role in securing your financial future. One of the standout advantages of investing in real estate is the wealth of tax benefits available to investors. Missed opportunities to keep more of your income can add up over time, and knowing what you can write off the taxes on your Roanoke investment property can help guide your decisions and increase your profits over the long term.
These tax incentives aren’t just random perks—they’re designed to encourage investment in the real estate market. By offering financial advantages such as deductions, depreciation, and capital gains exclusions, these laws make it more appealing to grow your portfolio while potentially lowering your tax burden.
Whether you’re planning for long-term rental income or building equity to fund your retirement, understanding how to leverage these tax benefits is a key strategy for maximizing the return on your real estate investments.
If you would like to avoid missing out on your allowable deductions and be more prepared for meeting with a tax professional, read more about what you can write off of the taxes on your Roanoke investment property.
Passive or Non-Passive
When investing in real estate, understanding the distinctions between passive and non-passive income is crucial, as tax laws treat them differently. These differences can significantly impact how you manage and maximize the tax benefits of your Roanoke investment property.
- Passive Income: Earnings from rental properties or other real estate investments in which you’re not actively involved.
- Non-Passive Income: Income earned through substantial or material participation, such as flipping houses or being heavily involved in day-to-day operations.
Leveraging Passive Losses
As a passive investor, you can benefit from tax laws by offsetting your passive income with passive losses, like property depreciation or repair expenses. This strategy helps reduce your overall tax liability, making your investment more profitable.
Material Participation and Real Estate Professional Status
Documenting your level of participation is essential when determining your tax treatment:
- Material Participation: If you’re heavily involved in your real estate business (e.g., making key decisions, managing properties directly), your income and losses are treated as active.
- Real Estate Professional Status: If you spend more than 750 hours per year and more than 50% of your working time participating in real estate activities, you may qualify as a real estate professional under IRS rules. This designation allows you to offset active income with real estate losses, providing even more tax benefits.
By carefully documenting your time and choosing the participation level that aligns with your investment goals, you can tailor your tax strategy to your needs. Consulting with a tax professional experienced in real estate can further help you optimize these benefits and ensure compliance with IRS regulations.
Write-Offs
If it has to do with your investment properties and isn’t an improvement, but a necessary part of maintaining, managing, or the expenses you may incur for operations in your portfolio, are all areas of allowable deductions for real estate investors on your Roanoke investment property.
What is Depreciation?
One of the most significant tools available to lower your taxes on investment property is depreciation. While depreciation doesn’t involve cash flow, it provides a valuable deduction from your taxable income, reducing your overall tax burden.
Depreciation reflects the natural wear and tear on your property over time. The IRS allows property owners to deduct a portion of this “loss” annually, even if the property is increasing in value. Essentially, it’s a way to account for the gradual decline in the property’s physical components, excluding the land.
How Does Depreciation Work?
- Depreciation applies to improvements, such as buildings or structures, not the land itself, which is considered to appreciate over time.
- The IRS assigns different depreciation timelines for various real estate asset classes:
- Residential rental properties: 27.5 years.
- Commercial properties: 39 years.
- Each year, a portion of the property’s value is deducted from your taxable income, significantly lowering your tax liability.
Why is Depreciation a Game-Changer?
Depreciation allows you to claim a paper loss while still enjoying cash flow from your property. This means you’re earning rental income while simultaneously reducing your tax obligations. Over time, these deductions can add up, enhancing the profitability of your investment property.
To fully benefit from depreciation and ensure accurate deductions, consult a tax professional familiar with real estate. They can help you determine eligible assets and ensure compliance with IRS guidelines.
Pass-Through Deduction
You should also be aware that you can write off the taxes on your Roanoke investment property through the pass-through deduction, or the Section 199A Qualified Business Income (QBI) deduction is in effect until the end of 2025 and allows for a 20 percent deduction on income from rentals on qualifying properties.
Capital Gains
Understanding capital gains is crucial when it comes to maximizing your tax benefits on an investment property in Roanoke. Capital gains refer to the profits you make from selling your property, and how they are taxed depends on how long you’ve held the property before selling it.
Short-Term vs. Long-Term Capital Gains
The IRS distinguishes between short-term and long-term capital gains based on the length of time you’ve owned the property:
- Short-Term Capital Gains: If you sell your property within one year of purchasing it, any profit is considered short-term and taxed as ordinary income, which can be at a much higher rate (up to 37% depending on your tax bracket).
- Long-Term Capital Gains: If you hold the property for more than one year, the profit is taxed at the long-term capital gains rate, which is typically lower (0%, 15%, or 20%, depending on your income level).
How to Strategize for Lower Capital Gains Tax
- Hold for the Long-Term: To take advantage of the lower long-term capital gains rate, try to hold onto your property for more than a year before selling. This simple strategy can make a huge difference in the amount of tax you pay.
- Use Depreciation to Offset Gains: While depreciation reduces your taxable income during ownership, be aware that it may lead to recapture taxes when you sell the property. However, you can still potentially lower your overall tax bill by timing your sale carefully and maximizing deductions.
- Consider 1031 Exchange: If you plan to reinvest the proceeds from your sale into another property, you might qualify for a 1031 exchange, which allows you to defer paying capital gains taxes. This strategy can help you avoid paying immediate taxes while still growing your real estate portfolio.
By understanding the differences between short-term and long-term capital gains and incorporating smart strategies, you can minimize your tax liability and maximize your return on investment when selling your Roanoke property.
Special Loss Allowance
Another key tax benefit that can help reduce your tax burden on passive income from your Roanoke investment property is the special loss allowance. This allowance lets qualifying individuals write off up to $25,000 of passive losses against their other income, such as wages or salary, under certain conditions.
Who Qualifies for the Special Loss Allowance?
To take advantage of this benefit, you must meet specific criteria set by the IRS:
- Active Participation: You need to be actively involved in managing the property, even if you’re not doing the day-to-day work yourself. This could include tasks like approving tenants, deciding on major repairs, or managing leasing agreements.
- Income Limits: The special loss allowance is phased out for individuals with higher incomes. If your modified adjusted gross income (MAGI) exceeds $100,000, the deduction gradually decreases. Once your MAGI exceeds $150,000, you’re no longer eligible to claim this deduction.
How the Special Loss Allowance Works
- If your property generates losses (for example, due to repairs, property depreciation, or vacancies), you can use the special loss allowance to write off up to $25,000 of those losses against your ordinary income.
- For a married couple filing jointly, this allowance is $50,000.
Why is This Important?
This benefit can significantly reduce your taxable income, which can be a game-changer if you’re trying to offset your rental property losses. It allows you to keep more of your income, even if your property isn’t currently generating a profit, by reducing your overall tax liability.
To maximize the advantage of the special loss allowance, ensure that you’re actively participating in the management of your investment property and be mindful of the income limits that apply. If you’re unsure whether you qualify, a real estate-savvy tax professional can help ensure you’re getting the most out of these opportunities.
Why not work with a team of professionals experienced in real estate investments that stay up-to-date on how current tax laws affect investors, like a local professional investor at Linken Investments? When you work with our professional investors at Linken Investments, we will help you find the perfect property for your investment strategy so you can write off the taxes on your Roanoke investment property. Let the pros at Linken Investments help you earn the highest possible returns on your investment dollar. And don’t forget to ask about our current inventory of the best properties available. Call Linken Investments at 540-596-5030.