Navigating tax season can be stressful. But tax planning can also be a tool to help you achieve your investment goals — especially when you start early. Two real estate tax experts share six tips for making taxes less of a headache in 2024.
As you consider your financial and investment goals for the year, don’t forget to think about the tax implications. Some tools that allow you to save on or defer taxes are much easier to implement if you plan ahead, says Amanda Han, co-founder and director of California-based Keystone CPA and co-author of “The Book on Tax Strategies for the Savvy Real Estate Investor.”
For instance, if you decide to seek real estate professional status — which allows you to use losses from your rentals to offset ordinary, not just passive, income — it’s easier to accumulate the required hours devoted to real estate work if you start in January rather than, say, October. Or, if you’re planning to sell a property, a 1031 exchange can help defer taxes, but only if you prepare to meet strict rules in advance.
It’s easy to miss potential deductions when you’re trying to decipher a pile of receipts months after the fact. The best system for tracking income and expenses is the one you’re comfortable using on a weekly or monthly basis, Han says.
“You don’t want to be in a place where you avoid it all year and have to worry about it at the end,” she says.
Keep business and personal expenses separate, and track income and expenses separately for each property. Don’t forget to keep notes documenting the purpose of your business expenses in addition to records of expenses, like receipts, says Toby Mathis, managing partner at Anderson Business Advisors and a Las Vegas-based attorney.
A calendar can be a useful tool if you record hiring a vendor to come to your property for a repair, or the purpose of a business meeting over a meal. The calendar format can be digital or paper, as long as there’s room for notes, and it’s best to make those notes in the moment, before it slips your mind, he says.
“Anytime I’ve seen someone make a mess of their books, it’s because they were doing journal entries of dollar amounts without recording what the expenses were for. Especially if you’re going back a couple years, it can be a puzzle,” he says.
If you have independent contractors you work with regularly, consider requesting W-9 tax forms from any you expect to pay at least $600 over the course of the year, Mathis says.
“It’s a pain if you don’t have that information and you’re trying to do their 1099 at the end of the year,” he says, referencing a tax form documenting payments to individuals who aren’t employees.
In addition, if you’re audited, it may be difficult to prove that a contractor wasn’t an employee without a W-9, which could leave a business owner facing penalties for failing to withhold taxes, Mathis says.
Holding your investment properties in legal entities, not your personal name, can provide you liability protection, but having too many creates added costs and complexity, Han says.
When evaluating the structure of your business, look at the costs and benefits and try to strike a balance, she says. A more complex business structure may bring peace of mind through liability protection, and if you have a job in real estate in addition to your investment properties, you may realize tax savings. But that complexity will also carry with it a higher cost and require more time to maintain the structure properly.
Work with your attorney and tax adviser to review how your business is structured and make sure you’re using your legal entities correctly at the start of the year, as it’s more difficult to make changes midway through, Han says.
Under the 2017 Tax Cuts and Jobs Act, business owners could, temporarily, use 100% bonus depreciation to deduct the full cost of eligible property in the same year it was placed in service. The increased bonus depreciation percentage began phasing out last year.
In 2024, business owners will be able to deduct 60% of the cost of eligible property in the year it’s placed in service, and the remainder will be depreciated over the normal life of the asset in subsequent years. The bonus depreciation percentage will continue to decrease an additional 20% each subsequent year.
Extensions aren’t just for procrastinators. Filing for an extension gives you more time to gather the information you need and complete your return. It also may provide insights into how your finances are shaping up in the next year, such as whether an increase in income could push you into a higher tax bracket. That could affect how you choose to deploy certain tax planning strategies, Han says.
You may not be able to delay filing if you’re planning to refinance or take on a new loan, as lenders may want to see a current tax return, she says.
Don’t forget that extending the deadline to file your tax return doesn’t give you more time to pay. You still need to pay in April, using your best estimate of what you’ll owe, and consider adding a bit of cushion to avoid risking a penalty, Han says.