As the year draws to a close, real estate investors are presented with a golden opportunity to not just close deals, but also make strategic moves that can result in substantial tax savings. Failing to plan ahead could mean missing out on valuable tax benefits that could otherwise be reinvested back into your portfolio. By implementing a few key strategies before December 31, you can minimize your tax liability for 2024 and set yourself up for a more financially robust future. Here’s a comprehensive guide to top tax-saving maneuvers, tailored especially for mid-income investors, to consider before the year ends.
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Take Advantage of Accelerated Depreciation
Depreciation is a powerful tax advantage for real estate investors. Consider performing a cost segregation study to break down your property into depreciable components, allowing for larger tax deductions in the initial years of ownership. Even if you don’t complete the study by year-end, closing on the property before December 31 can still make you eligible for these benefits on your 2024 tax return. -
Execute a 1031 Exchange
A 1031 exchange enables you to defer capital gains taxes by reinvesting sale proceeds into another property. This strategy helps you avoid a hefty tax bill and keeps your money actively working for you in a new investment. Consult your CPA before selling any property to determine if a 1031 exchange is the right move for you. -
Prepay Expenses
Prepaying expenses for your rental property before the end of the year can effectively reduce your taxable income for 2024. By paying property taxes, insurance premiums, or conducting necessary repairs now, you can maximize your deductions, particularly if you’ve experienced a higher-income year. -
Utilize the Qualified Business Income (QBI) Deduction
Through an LLC, S-Corp, or as a sole proprietor, you might be eligible for the QBI deduction, allowing you to reduce your taxable income by up to 20% of your qualified business income. Consult your CPA to see if you qualify for this deduction and how to optimize its advantages. -
Shift Income to Your Children
Consider reducing your tax burden by shifting income to your children, especially if they are in a lower tax bracket. Paying your kids for assisting with tasks related to your real estate business can result in deductible business expenses, ultimately lowering your taxable income. -
Maximize Your HSA Contributions
Contributing to a health savings account (HSA) can significantly reduce your taxable income while providing triple tax benefits. Consider maximizing your HSA contributions before December 31 to take advantage of this tax-saving opportunity. -
Max Out Your FSA Contributions
Contributing to a flexible spending account (FSA) can also lead to tax savings by setting aside pre-tax dollars for qualified expenses related to medical or dependent care. Review your FSA contributions and make the most of these accounts before the year ends. -
Harvest Capital Losses
By selling underperforming investments to offset gains elsewhere in your portfolio, you can reduce your taxable income for the year. Review your investments for potential capital losses to benefit from this tax-saving strategy before December 31. -
Explore Tax Credits
Discuss potential tax credits with your accountant, as these credits directly reduce the taxes you owe. Aside from common credits like the Child Tax Credit or Saver’s Credit, consider other credits like the Residential Energy Credit or Opportunity Zone Credit to maximize your tax savings. -
Consider Charitable Donations
Donating to a qualified charity can help you give back and reduce your taxes simultaneously. Whether in cash or appreciated assets, charitable donations can provide tax deductions based on the fair market value of the asset. - Contribute to an IRA
Contributing to an individual retirement account (IRA) is a viable way to lower your tax liability. Consider traditional or Roth IRAs to reduce your taxable income for 2024 and plan for your retirement.
Taking proactive steps before the December 31 deadline can significantly lower your 2024 tax burden and pave the way for smarter financial decisions in the future. By combining strategies such as accelerated depreciation, maximizing contributions, tax credits, and long-term investment approaches, you can ensure you’re taking full advantage of available tax savings. Don’t wait until it’s too late—consult with your CPA, review your options, and seize the opportunity to optimize your tax situation for the upcoming year.
