Year-end real estate tax strategies

As we approach the end of the year, now is a prudent time to review your real estate investments and ensure you're taking full advantage of available tax strategies. Proper tax planning can reduce your taxable income and position you for continued growth in the coming year. Let's look at some of the top tax planning strategies for real estate homeowners and investors.

Observing the landscape

Monitoring taxation policy is essential to make the most informed financial decisions. Ongoing legislative and administrative changes will impact your real estate portfolio. For instance, the expiration of tax breaks or new tax laws will likely alter your tax liability and strategy. Working closely with your tax advisor is vital to stay aware of developments that will influence your plans for the year ahead.

Economic considerations and evaluating your portfolio

Tax planning is an essential element in managing and maximizing the value of your real estate portfolio. Consider factors including property appreciation rates, rental income, and market trends. When assessing your assets, adjusting your holdings based on market conditions could yield significant tax benefits. For example, selling underperforming assets before year-end to offset capital gains from stronger investments might be a prudent move.

Leverage depreciation to reduce taxable income

Real estate depreciation is a powerful tool for reducing taxable income. Even though your property might be appreciating, the IRS allows you to take annual deductions based on the perceived "wear and tear" of the property. For residential properties, the depreciation period is 27.5 years, while for commercial properties, it's 39 years. Coastal Delaware homeowners and investors can benefit by working with a tax professional to optimize their depreciation schedules and accelerate deductions where possible.

Take advantage of bonus depreciation

Although the Tax Cuts and Jobs Act allowed for 100% bonus depreciation on eligible property improvements, it's important to note that this benefit is now halfway phased out. As of 2024, bonus depreciation is down to 60% and will continue decreasing each year until it phases out entirely by 2027. If you're considering renovations or significant improvements, it's wise to act now to maximize this benefit before it diminishes further.

Utilize 1031 exchanges to defer capital gains

A 1031 exchange allows you to defer capital gains taxes when you sell a property and reinvest the proceeds into a similar property. This strategy is advantageous if you want to upgrade or diversify your portfolio. For example, you could swap a rental property in Rehoboth Beach for a commercial property in Bethany Beach without paying taxes on the appreciation. The key is to follow the IRS's strict guidelines, including completing the exchange within 180 days.

Explore tax credits for energy efficiency and historic rehabilitation

Investors and homeowners in Delaware may be eligible for tax credits by making energy-efficient upgrades to their properties. These credits can help offset the cost of installing solar panels, energy-efficient windows, and other sustainable improvements. Additionally, if you own a historic property, consider utilizing the Delaware Historic Preservation Tax Credit Program, which offers substantial credits for approved rehabilitation projects. This program can significantly reduce the overall cost of restoring and maintaining historic properties.

Retain professional advisors to maximize your benefits

Navigating these strategies requires a solid understanding of real estate and tax law. Consulting a real estate attorney, tax advisor, and financial planner can help ensure your investments are structured in a tax-efficient manner.

I'm here to provide insights and connect you with local professionals who can help you optimize your year-end tax planning. With the right strategy, you can minimize tax liabilities and keep more of your hard-earned wealth. Contact me if you have any questions- Henry