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With 2023 coming to a close, it’s the best time to get ahead of your taxes. Get with your tax professional, figure out where you stand, and then make some final moves that could save you big bucks when it comes to tax time in a few months. Make sure you know exactly what your options are before you run out of time to do something about it.
We talked to two expert real estate CPAs and asked them what they are advising clients to do, and importantly not do, in these last few weeks of the year.
Timing is Everything
Amanda Han is a real estate CPA and tax strategist and the author of The Book on Tax Strategies for the Savvy Real Estate Investor for BiggerPockets. She invests all across the U.S.
BiggerPockets: What should investors be looking to do at the end of the year to prep for taxes?
Some of the things investors should look at with respect to year-end is [thinking about] the timing of a transaction. For example, if you are close to closing on a sale that will have a lot of gain, consider deferring that income into Jan. 1 of next year. By delaying the close of that transaction for even just a few days, you can defer the taxes for a whole entire year.
The opposite applies for expenses. If you need some expenses to offset this year’s income, consider prepaying some of those recurring items before the end of the year to accelerate the write-off into this year.
Even payments charged on a credit card by year-end can be potentially tax deductible. You may not need to have paid off the credit card [for it to count for tax year 2023].
BiggerPockets: What should investors avoid?
One thing investors should avoid is spending money just for purposes of tax deductions. In other words, if it’s not something you need, don’t pay for it just because you may get a tax benefit.
Be Proactive and Communicate With Your Tax Professional
Danielle Rutigliano is a CPA and real estate investor based in Long Island, New York. She is the owner of a boutique CPA firm that specializes in bookkeeping, tax planning, and tax preparation for real estate clients throughout the U.S. As an investor, she’s scaled her portfolio to a little over 40 units in New York, Indiana, and Tennessee in three years.
BiggerPockets: What should investors be looking to do at the end of the year to prep for taxes?
Investors should be talking to their CPA, who specializes in real estate, before the end of the year to discuss last-minute tax-saving opportunities for 2023.
They should discuss frequently missed deductions, such as the home office deduction, business use of cell phones, and gifts. They should also discuss if they qualify for the short-term rental loophole or real estate professional status for 2023. If the taxpayer has children, they should discuss with their CPA if it’s beneficial to pay their kids to help them in December for an additional deduction before year-end.
Investors should keep their books organized and avoid waiting until the last minute to catch up, as this leads to missed deductions.
Investors who purchased properties in 2023 should talk to their CPA to see if they can benefit from getting a cost segregation study done on their property, which would allow them to utilize bonus depreciation to maximize rental losses.
Investors should consider prepaying for expenses or services in 2023 to maximize deductions if they are a cash-basis taxpayer. This could be insurance, real estate taxes, or other property-related expenses.
Investors who have active real estate businesses, such as real estate agents, fix-and-flip investors, and wholesalers, should find out from their CPA if they would benefit from paying themselves a reasonable salary in December to reduce self-employment tax.
BiggerPockets: What should investors avoid?
- Waiting until the last minute to finalize their 2023 bookkeeping.
- Working with a tax preparer who does not understand the tax code for real estate clients.
- Commingling business and personal expenses.
- Putting rentals in S-Corps
- Investors should try to avoid selling properties at a gain before year-end: They should try to push the closing to 2024 so they have a full year to plan to minimize the tax impact of that gain.
BiggerPockets: What are some strategies you wished more people utilized?
- I wish more investors took advantage of real estate professional status because it is a very powerful strategy for tax savings.
- Proper entity structuring is important and can save taxpayers significant costs. Putting properties in the wrong entity is a very costly mistake, and setting up a rental portfolio structure incorrectly can result in excessive tax preparation costs.
- Bonus depreciation is also a very powerful tool. I hope that more investors work with their CPA to see if they can benefit from doing a cost segregation study.
Dreading tax season?
Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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