One of the first strategies for commercial real estate investors is selecting the right entity. Entities such as LLC can provide protections for investors where as being a sole proprietor may not receive any protections. You should probably check out some of the best llc services before starting. Using the right entity also uses distinct legal documentations and operating agreements that offer deductions that a sole proprietor simply would not get.
A mistake many CPAs make is overtaxing rental income. How is this done? Well since the building in question has tenants, a revenue stream is coming in. Rents for the use of property are not subject to self-employment taxes. This means additional taxes such as social security is not included. By mistakenly overtaxing, thousands of dollars of revenue can be lost. If looked over soon enough some money may be recovered, but after a few years this is not possible.
Utilizing depreciation deductions is also vital for success. Many believe it to be the most valuable deduction because it does not require any money to be put down. The money received via these tax savings can then be used to invest in either more real estate. The tax break is valuable through the recovery period of the property.
Another useful deduction is done by classifying jobs that fix up areas of the property repairs and not capital improvements. By differentiating between the two, property owners can then receive a large amount in tax deductions, whereas capital improvements spread out deductions over a long period of time. Documenting these repairs into many separate acts is a great way to receive even more tax deductions. Lumping them all together wastes a solid opportunity to save a good amount of money.
If selling property is on the horizon, avoiding being labeled as a dealer by either a CPA or the IRS is essential for saving money. A dealer is put into the highest capital gains tax bracket, while an investor does not. This will save real estate investors tons of money in taxes. With capital gains taxes, investors can lose up to 50% of revenue from the sale of the property.
When investing in commercial real estate, knowing the appropriate tax strategy can lead to saved money and an increase in wealth building. Consulting a CPA who knows their trade can assist in any commercial real estate tax needs.
Andrew Yessen is a blogger for HomeVestors, America’s #1 homebuyer. Learn more about HomeVestors at our site today!