For actual property traders, the finish of the yr isn’t nearly closing offers—it’s about making good strikes that might prevent 1000’s in your tax invoice. For those who don’t plan forward, you would possibly miss out on important tax advantages that might in any other case be reinvested into your portfolio.
You possibly can take management by implementing a number of easy methods earlier than Dec. 31 to make sure you’re minimizing your 2024 tax legal responsibility and setting your self up for a stronger monetary future. Right here’s a information to the best tax-saving strikes, particularly for mid-income traders, which you can make earlier than year-end.
1. Take Benefit of Accelerated Depreciation
Depreciation is among the greatest tax benefits actual property traders have. For those who personal a rental property and haven’t finished a price segregation (price seg) research, now’s a superb time to contemplate it. A price seg research breaks down your property into parts (like home equipment or fixtures) that may be depreciated quicker, resulting in bigger tax deductions within the early years of possession.
Even in case you don’t end the associated fee seg research by Dec. 31, closing on the property earlier than year-end nonetheless qualifies you for these advantages if you file your 2024 return.
Don’t personal property but? You possibly can nonetheless profit by investing in actual property offers that plan to do a value seg research. If the deal closes by the top of the yr, you possibly can make the most of the accelerated depreciation.
Take motion
Discuss to your CPA about beginning a value seg research or discover actual property fairness offers that can shut earlier than the yr ends.
2. Execute a 1031 Change
For those who’re promoting a property this yr, a 1031 change allows you to defer capital good points taxes by reinvesting the sale proceeds into one other property. This might help you keep away from a big tax invoice and maintain your cash working for you in a brand new funding.
Let’s say you promote a rental property for a $100,000 acquire. And not using a 1031 change, you can be going through as much as $20,000 in capital good points taxes. By reinvesting in one other property via a 1031 change, you possibly can defer these taxes and maintain that $20,000 working for you in a brand new funding.
To qualify, you could determine a substitute property inside 45 days and shut inside 180 days.
Take motion
Discuss to your CPA about whether or not a 1031 change is proper for you earlier than promoting your property.
3. Prepay Bills
A simple technique to cut back your taxable revenue is to prepay bills to your rental property. Paying property taxes, insurance coverage premiums or making crucial repairs earlier than the yr ends lets you declare these deductions for 2024. This technique is particularly helpful in case you’ve had a higher-income yr and wish to maximize your deductions.
Take motion
Evaluation upcoming bills, and prepay them earlier than Dec. 31 to learn from the deduction this yr.
4. Use the Certified Enterprise Revenue (QBI) Deduction
For those who personal actual property via an LLC, S-Corp, and even as a sole proprietor, it’s possible you’ll qualify for the Certified Enterprise Revenue (QBI) deduction. This deduction lets you cut back your taxable revenue by as much as 20% of your certified enterprise revenue. Eligibility relies on your revenue stage, so verify along with your CPA to see in case you qualify for this deduction.
Take motion
Seek the advice of along with your CPA about whether or not your actual property enterprise qualifies for the QBI deduction and the way you possibly can benefit from it.
5. Shift Revenue to Your Youngsters
In case you have kids, you possibly can cut back your tax burden by shifting revenue to them, particularly in the event that they’re in a decrease tax bracket. For 2024, kids can earn as much as $14,000 with out paying federal revenue taxes.
You possibly can pay your children to assist with duties in your actual property enterprise, reminiscent of managing paperwork, advertising and marketing, or property upkeep. These wages are a deductible enterprise expense, which lowers your taxable revenue.
Bonus: For those who personal a sole proprietorship or single-member LLC, you don’t need to pay Social Safety and Medicare (FICA) taxes on wages paid to kids below 18. You may as well contribute their earned revenue to a Roth IRA to jump-start on retirement financial savings.
Take motion
Set up a system to pay your kids for his or her work earlier than year-end, and seek the advice of your CPA to make sure compliance with tax guidelines.
6. Maximize Your HSA Contributions
In case you have a high-deductible well being plan (HDHP), contributing to a well being financial savings account (HSA) is a easy but highly effective technique to cut back your taxable revenue. HSAs supply triple tax advantages:
- Contributions are tax-deductible.
- Earnings develop tax-free.
- Withdrawals for certified medical bills are additionally tax-free.
For 2024, you possibly can contribute as much as $4,150 as a person or $8,300 as a household, with a further $1,000 catch-up contribution for these 55 and older. You may as well make investments HSA funds, permitting them to develop tax-free over time.
Take motion
Max out your HSA contributions by Dec. 31 to scale back your taxable revenue for this yr.
7. Max Out Your FSA Contributions
Contributing to a versatile spending account (FSA) is one other technique to save on taxes. FSAs assist you to put aside pre-tax {dollars} for certified bills.
There are two major varieties: medical FSAs and dependent care FSAs. Right here’s how they work and the contribution limits for every in 2024:
Medical FSAs
- Contribution Restrict: For 2024, you possibly can contribute as much as $3,200 to a medical FSA.
- Eligible Bills: Medical FSAs can be utilized for certified medical bills like physician’s visits, prescriptions, dental work, imaginative and prescient care, and different healthcare-related bills.
- Restrictions with HSA: You can not contribute to each a well being financial savings account (HSA) and a medical FSA in the identical yr in case you are utilizing a high-deductible well being plan (HDHP). Nonetheless, you need to use a limited-purpose FSA (for dental and imaginative and prescient solely) alongside an HSA.
Dependent care FSA (FSA DC)
- Contribution Restrict: The contribution restrict for dependent care FSA is $5,000 per family (or $2,500 if married submitting individually).
- Eligible Bills: Dependent care FSAs cowl bills associated to the care of a kid below age 13, a partner with disabilities, or an aged mother or father, together with daycare, preschool, or in-home care.
- Can You Contribute to Each? Sure, you possibly can contribute to each a medical FSA and a dependent care FSA in the identical yr, as they cowl several types of bills and have separate contribution limits.
Vital guidelines
FSAs function below a “use-it-or-lose-it” rule, that means any unused funds on the finish of the yr could also be forfeited, until your plan affords a grace interval or a restricted rollover. You’ll want to evaluate your medical and dependent care wants for the rest of the yr and use any remaining FSA {dollars}.
Take motion
Maximize your tax financial savings by reviewing each your medical and dependent care FSAs, making certain you’ve contributed to and used them properly earlier than the yr ends. For those who’re contemplating contributing to an HSA, make sure you’re not contributing to a regular medical FSA to keep away from eligibility conflicts.
8. Harvest Capital Losses
If any of your properties or different investments have misplaced worth this yr, you possibly can harvest capital losses to offset good points elsewhere in your portfolio. This helps cut back your total taxable revenue for the yr.
For those who promote an asset at a $20,000 loss and have a $20,000 acquire from one other funding, your losses and good points cancel one another out, that means no taxable acquire. In case your losses exceed your good points, you possibly can offset as much as $3,000 of bizarre revenue and carry over any remaining losses to future years.
Take motion
Evaluation your portfolio for underperforming investments you possibly can promote earlier than Dec. 31 to learn from this technique.
9. Discuss to Your Accountant About Tax Credit
Tax credit instantly cut back how a lot you owe in taxes, making them significantly invaluable for mid-income traders. Listed here are some key credit to contemplate:
- Baby Tax Credit score: In case you have kids, this credit score can cut back your tax legal responsibility by as much as $2,000 per qualifying youngster.
- Saver’s Credit score: For those who contribute to a retirement plan, reminiscent of an IRA or 401(okay), and your revenue falls beneath sure limits, it’s possible you’ll be eligible for the Saver’s Credit score. This offers as much as $1,000 (or $2,000 for married {couples} submitting collectively) as a direct credit score to your taxes.
- American Alternative Tax Credit score: For those who or your dependents are paying for school, this credit score may give you as much as $2,500 per yr for eligible schooling bills.
These credit are sometimes essentially the most related for mid-income earners, as they apply to widespread life conditions like elevating kids, saving for retirement, or paying for schooling.
Extra credit to contemplate
Whereas these credit are tailor-made to typical mid-income tax conditions, you would possibly nonetheless profit from these extra credit, particularly in case you’re making bigger investments:
- Residential Power Credit score: For those who’ve put in renewable vitality methods reminiscent of photo voltaic panels or wind generators in your property, this credit score might help decrease your tax invoice.
- Electrical Car (EV) Credit score: For those who bought an electrical car this yr, you can qualify for as much as $7,500 for a brand new EV or $4,000 for a used EV.
- Alternative Zone Credit score: Investing in alternative zones can assist you to defer or cut back capital good points taxes, making this a helpful credit score in case you’re concerned in bigger actual property or enterprise growth initiatives.
Take motion
Work along with your CPA to determine which credit apply to your state of affairs and make sure you’re maximizing your tax financial savings for 2024.
10. Charitable Donations
Donating to a certified charity is a good way to present again and cut back your taxes on the identical time. You possibly can donate money or appreciated property, reminiscent of shares or actual property, and obtain a tax deduction primarily based on the truthful market worth of the asset.
Take motion
Make any charitable donations earlier than Dec. 31 to get the tax deduction for this yr.
11. Contribute to an IRA
Whereas there are a number of methods it is best to pursue first, contributing to a person retirement account (IRA) is a viable technique to cut back your tax legal responsibility. Contributions to a conventional IRA are tax-deductible, which lowers your taxable revenue for the yr. Nonetheless, it’s essential to keep in mind that this technique defers your revenue, locking it up in a government-controlled belief account till retirement.
For 2024, you possibly can contribute as much as $6,500 to an IRA (or $7,500 in case you’re 50 or older). You might also wish to think about a Roth IRA, which doesn’t present a direct tax deduction however permits for tax-free withdrawals in retirement.
Whereas this technique might help cut back your tax burden, it’s price contemplating how locking up your revenue till retirement matches into your total monetary technique.
Take motion
If contributing to an IRA matches your long-term targets, you should definitely make your contributions by the tax submitting deadline to scale back your taxable revenue for 2024.
Ultimate Ideas
By implementing these end-of-year tax methods, you possibly can considerably cut back your 2024 tax burden and maintain extra of your hard-earned cash. Whether or not it’s profiting from accelerated depreciation, maximizing your HSA or FSA contributions, or contributing to an IRA, every step could make a significant distinction in how a lot you owe. It’s additionally important to contemplate how tax credit, charitable donations, and long-term funding methods like 1031 exchanges can additional improve your monetary place.
The secret is to behave earlier than the Dec. 31 deadline. Don’t wait till it’s too late—converse along with your CPA, evaluate your choices, and make the proper strikes to make sure you’re taking full benefit of all out there tax financial savings. By being proactive, you’ll not solely decrease your taxes now but additionally lay the groundwork for smarter monetary selections and stronger wealth-building sooner or later.
Word By BiggerPockets: These are opinions written by the writer and don’t essentially symbolize the opinions of BiggerPockets.