Rental income does not fall subject to Medicare taxes or social security, unlike other forms of income. While you would pay 7.65% for a normal salary, self-employed people pay 15.3%. However, you avoid this if it is rental income.
As a real estate investor, you have the opportunity to refinance a property. Some do not find refinancing to be an attractive option, but if you do this, you can avoid taxes. It may sound underhanded, but the law is written this way for a reason. To do this, you will pull capital from your investment and refinance, even though it does increase risk.
Exchanging properties falls under the section 1031, which means that the exchange is entirely tax-free! You then can experience growth without paying any taxes on it. Then, you get to use 100% of those sale profits for future investments!
Live in Your Investment Property
Want to profit $250,000 as an individual or $500,000 as a couple—tax-free? You can! After purchasing an investment property, live in it for two out of five years. This makes the property tax exempt, putting more money in your pocket.
Because of the expenses associated with property depreciation, you can actually save a little bit in taxes. The Internal Revenue Service knows that you have to pump money into a depreciating home, so you are within your rights to state this when you file your taxes. In fact, the higher your tax rate, the more you save.
Unfortunately, you cannot jump on the installment sale bandwagon if you’re a flipper, but if you’re an investor, installment sales can work in your favor. You are allowed to defer the capital gains tax as long as you recapture the depreciation amount during the time of the sale. Think of it as credit rather than a bank loan.
If you want to let your property appreciate, you can! Hold onto the property for awhile and you will not be subjected to taxes. This gives you time to clean it up or let the market value increase naturally. Then, once it comes time to sell, you can take advantage of other methods of saving on taxes.
Make More Money Now
There are a number of ways to increase profit when it comes to taxes. Real estate investment can help you spend less in tax and put more profit in the bank. Remember to take advantage of these methods when it comes tax time! You won’t regret it.