Tax season may not be until April, but effective 2022 tax planning begins now. Year-end tax planning is useful in many industries, especially for real estate investors. Reviewing the prior year’s tax return and comparing it to this year’s profit and deductibles can help you prepare for your 2022 tax obligations. And do not forget about planning for retirement.

We have compiled a list of strategies for real estate investors to use when planning for their year-end taxes.

Key Takeaways

• Timing your assets’ placed-in-service date may make you qualify for write-offs faster.
• Organizing your receipts and costs incurred helps you calculate accurate expenses.
• Depreciation is a good way to reduce taxable income without affecting cash flow.
• Full-time licensed real estate agents may qualify for tax deductions on ordinary income.
• You can use gift assets or donations to charitable organizations to reduce tax liability.
• Maxing out your retirement accounts can also reduce tax obligations.

Time the Date Placed in Service

A real estate asset is considered taxable income once it generates revenue. Until a tenant moves in and begins paying rent, it’s not yet considered a taxable asset. Timing your placed-in-service date can help manage taxes. The faster you prepare and advertise the property for rent, even if you’re not yet able to secure a tenant, the more you may qualify for tax write-offs. Timing your placed-in-service date can also help you maximize capitalization and depreciation. Limiting your capital gains can also be a part of an effective tax strategy for real estate investors.

Organize Your Receipts

Real estate investments come with a lot of costs, including repairs, maintenance, and interest. Keeping track of these receipts and costs throughout the year can make it easier to calculate an accurate amount. Other year-end costs include mortgage points, closing costs, and prepaid interest. Current tax laws allow real estate investors to expense as much as 100% of business property that went into service in 2022.

Calculate Depreciation and Plan How To Divide It

Depreciation is a valuable tool for real estate investors. Depreciation refers to deducting the costs of buying and improving real estate property. It allows you to reduce your taxable income without affecting your cash flow. While property depreciates, land doesn’t. Completing a comparative market analysis with recent sales or scheduling a land assessment can help you determine the percentage of depreciation you can use when filing. Real estate investors can also deduce depreciation in one large sum or distribute it over the life of the asset.

Use Your Real Estate License to Your Advantage

Some real estate investors may choose to hold a professional real estate salesperson’s license. Holding a license may offer some benefits when it comes to qualifying for rental losses against income. Generally, real estate investment income is passive income, which means it only counts toward passive income deductions.

Working as a real estate agent may allow you to itemize the costs of real estate investments against your active income. It’s important to note that there are strict requirements on what qualifies as working as a licensed agent.

Time Your Investment Gifts or Donations

Gifting assets or making donations to approved charitable organizations can also reduce your year-end tax liabilities. Gifting or designating a family member can reduce how much you owe this tax season. You can also deduct holiday gift expenses for clients or staff. Charitable gifts of both property and cash can reduce adjusted gross income. You also have the option to bundle most of your charitable donations in one year and then take a standard deduction the following year or spread your donations out over multiple years.

Max Out Your Retirement Accounts

Maxing out your retirement accounts at the end of the year is a great way to prepare for retirement while also reducing your tax liability. An allocated grace period allows you to fund retirement accounts in the first few months of the following year to go toward the previous year’s maximum contributions. You may even consider converting your retirement account to one that offers more tax benefits.

Spread Out Your Sales

Deferring income, or in the case of real estate investments, sales can push back your tax liabilities for another year. If you plan on buying or selling any new real estate investments, timing them right at the end of the year can help you better prepare for taxes. If you have a deal that’s in progress in December, pushing it back a week or two to finalize and close after Dec. 31, 2022, gives you another year to plan for taxes.

A wash sale, which is when you sell an asset at a loss and then purchase a new one within 30 days, no longer protects real estate investors from taxes. Timing the purchase of your new property at least 30 days after the sale can help avoid newer wash sale rules. Timing your expenses can also be useful. If your office needs all new computers and you expect your tax liabilities to be high for 2022, squeezing in the purchase before the end of the year may be financially beneficial.

Analyze Your Investment Portfolio

The end of the year is also a good time to analyze your investment portfolio and make any necessary adjustments for rebalancing. Real estate investments can be worthwhile but also carry with them a higher level of volatility. Learning other investment strategies can help diversify your income and reduce risk.

Plan Next Year’s Assets

Now is also the time to plan the sale or purchase of any real estate assets you’re holding in the following year. Choosing properties in certain zones, such as qualified opportunity zones, can reduce your tax liabilities for the following year. This is also a good time to create an investment strategy that includes a good mix of real estate and other investments to balance your portfolio.

Real estate laws are constantly changing, which also affects how much you can deduct for certain real estate expenses. An important part of any real estate investment strategy is asset protection. Need help creating your 2022 tax planning strategy? Schedule your wealth planning blueprint call today, so you can enter the new year ready to maximize your profits.