If you’re a landlord who owns your own rental property, don’t go chasing tax loopholes and a couple of half measure moves to try to reduce your liabilities. You need smart, lawful planning. The idea of keeping your rental income tax-free might seem ambitious, but Dominion’s evidence-based approach will put you on the right track.
Our clients don’t settle for generic solutions anymore and nor should they. Instead, our methods rely on time-tested strategies that have had decades of case law behind them and are driven by a vast, jurisdictionally non-restricted network.
We believe that tax elimination should have rigorous structuring that’s expertly tailored to UHNWIs and HNWIs who demand peace of mind.
1031 Exchange – Deferring Taxes
If you’re serious about building lasting wealth and are interested in deferring taxes on rental property sales, understanding the 1031 Exchange is a great place to start. A 1031 Exchange is an important tool in deferring taxes on capital gains. Here’s how it works: The property owner instead reinvests the proceeds of the sale into a “like-kind” property in order to pay capital gains taxes on the sale.
What You Need to Consider
Timing is essential. The IRS mandates a strict timeline: Potential replacement properties must be identified within 45 days and those same replacement properties must be closed on within 180 days of the sale. If either deadline is missed, the tax deferral is lost as capital gains tax comes back.
What’s the Advantage?
This deferral gives investors the ability to keep growing their portfolios by continuing to reinvest those gains – and do so in such a way that, assuming each deferral is the tax equivalent of front loading retirement savings, the investor actually pays less tax later down the road on the same amount of money.
Whereas with a normal sale your profits are immediately cut into with taxes, a 1031 Exchange allows your capital to work harder to compound over time without an immediate tax taken out.
Depreciation for Strategic Deductions – Leverage It
Depreciation is one of the most underutilized tools in tax reduction. Property owners can deduct a portion of the value of their property every year as the property “wears down” over its designated “useful life.”
Useful life means 27.5 years for residential property and 39 years for commercial property. In this case, the deduction is offset against rental income, thereby reducing the overall tax burden.
Accelerated Deductions through Cost Segregation
When components of the property are broken out (such as HVAC systems, appliances, and fixtures), depreciating them at an accelerated basis allows for equally accelerated deductions in earlier years of ownership. This is a method known as cost segregation, and it can offer substantial tax savings and free up some cash flow.
Stay Compliant
Maximizing depreciation is only half of the equation; the other half is equally important, and that’s maintaining compliance. Depreciation schedules need to be formally recorded in order to meet IRS guidelines. Dominion helps to organize every detail so clients are able to stay ahead, freeing them from compliance risks.
How to Unlock Equity Without Triggering Taxable Income
If you own rental property and want to access capital, you often create locked-in equity. Why? Because it can’t be liquidated without triggering a taxable event. Property owners can thus unlock funds by borrowing against the equity and not sell incurring capital gains taxes. This strategy enables you to free up cash through a home equity loan or line of credit, yet you preserve tax efficiency.
Tax Efficiency with Liquidity?
Equity lending helps keep rental income tax efficient while offering liquidity to fund future investments or running expenses. The result? Money for expansion without paying short-term taxes.
Some Considerations to Think About
There is, however, a risk involved with this strategy. While more leverage can increase cash flow, you should always check with financial experts first to help strike a balance between risk and returns. A risk assessment is always part of Dominion’s wealth governance approach to ensure clients are not overloaded with debt.
It Is Possible to Shield Rental Income with a Self-Directed IRA
There are added layers of flexibility and tax benefits with a Self-Directed IRA (SDIRA) for real estate investors. Unlike a traditional IRA, an SDIRA lets you seek investments in alternative assets, like rental properties, in order to gain control over real estate holdings. But it comes down to whether it’s a Roth IRA or a traditional IRA.
Tax Shelter Potential
Rental income can be protected from immediate taxation when invested in rental property with an SDIRA, growing on a tax-deferred (Traditional IRA) or tax-free (Roth IRA) basis inside the account. For high-net-worth investors, this offers a unique advantage: No annual tax obligations and capital growth.
Cautions and Compliance
Specialized custodians, who are responsible for IRS compliance with respect to SDIRAs transactions and investments, are mandated to oversee SDIRAs. IRA custodians help keep the investments for an IRA within the bounds of the law, but the investor has to remember to make their contributions and withdrawals without the custodian’s help. The investor also has to keep their account in compliance. Working with clients, Dominion provides clarity and control of SDIRA investments by streamlining these processes.
Maximize Deductions and Minimize Taxable Rental Income
Potential deductions should not slip through your fingers. Property owners who are hip to the tax game know that any and every allowable rental expense should be claimed to minimize taxable rental income. These deductions include mortgage interest, management of property fees, necessary maintenance and repair, and so on. Even insurance premiums are fair game.
Don’t forget the often-forgotten professional fees deductions. Fees to accountants, property managers, or legal professionals who are directly involved in your rental property management are deductible.
These will reduce your taxable rental income dramatically, but you have to conduct impeccable record-keeping. Accurate records that document all income and expenses are a must for receiving maximum benefits from doing your taxes.
Real Estate Professional Status (REPS) – How to Unlock Additional Benefits
If you are very involved in real estate, being Real Estate Professional Status (REPS) under IRS guidelines is a lucrative perk. With REPS, you can deduct losses from rental properties from other income sources, say wages or investment income. That’s different from the usual rule, which allows such deductions only with respect to rental property income.
But REPS status imposes severe requirements. The IRS requires that at least more than 50% of your personal services must be devoted to real estate trades and that you spend more than 750 hours on material participation in real property businesses in a given year. Material participation refers to taking a direct part in property management, property development, or property brokerage activities. Admittedly, passive investors probably won’t meet these criteria.
But if you do qualify as a Real Estate Professional, you can save quite a bit in taxes. Still, to be compliant, you’re going to have to maintain highly detailed records of all your real estate activities.
What About the Short-Term Rental Loophole?
Short term rentals, in a non-REPS context, provide an opportunity to offset earned income by simply renting out space in your residence. This depends on the idea of “material participation.”
When you actively take part in the management and operation of your short-term rental – advertising, guest communication, cleaning, and the like – you could potentially deduct rental losses against other income. Having this “loophole” enables other options for tax offsetting, but as always, following IRS requirements of active participation is a must.
Tax Planning Specialist Provides Expert Guidance
The real estate taxation world is a complex one, and precision is required. For this reason, enlisting the expertise of a Certified Public Accountant (CPA) or a tax advisor specializing in real estate investing is a necessity. They know the tax laws inside and out and can spot every deduction available to you so you end up with the greatest possible tax savings.
Beyond that, they can refine custom tax strategies according to your specific needs, objectives, and tolerances to risk. A solid strategy does not only save your tax payment but also secures your money and follows law alterations in the tax code.
And with our network of experts, we can offer this invaluable guidance that will prevent you from expensive errors and protect your assets with confidence.
Choose Dominion for Superior Asset Protection
Getting rid of taxes on rental income needs to be approached from many different angles. It’s a blend of professional knowledge, careful recording, and planning. We understand the scope of this, and we can ensure that you remain compliant from top to bottom. By taking a sophisticated approach to tax strategies, we direct high-net-worth individuals and families toward minimizing the loss of wealth buildup and keeping money safe and in check.
For a consultation on personalized asset protection and tax elimination strategies, we invite you to contact Dominion today. With our unwavering dedication to absolute asset protection, you can be sure your wealth is secured and your tax obligations minimized.
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