Six Real-Estate Tax Strategies Discussed in the Reel
The Reel describes six real-estate tax strategies: depreciation, accelerated depreciation, active participation, mortgage interest, property expenses, and 1031 exchanges. It says a tax preparer should advise you about applying them.
Key takeaways
- A rented residential property may be depreciated linearly over 27.5 years, reducing rental income after depreciation and expenses.
- Cost segregation and bonus depreciation may accelerate depreciation, particularly for short-term rentals; the Reel mentions approximately 25% depreciation in the first year for a purchased property.
- Active participation and certain requirements may allow losses to be applied against salary income, including more than 100 hours on an active short-term rental while being the person who spends the most time on the pro…
- Loan interest and property-related expenses may be deducted, reducing rental gains and potentially creating losses; depreciation may be recaptured when the property is sold.
- A 1031 exchange may defer tax when money is invested in a property with similar characteristics, with the property found within 45 days and the closing completed in less than six months.
Explanation
The Reel explains that a rented residential property may be depreciated linearly over 27.5 years, reducing rental income after depreciation and expenses. It also discusses accelerating depreciation through cost segregation and bonus depreciation, particularly for short-term rentals, with approximately 25% of a purchased property potentially depreciated in the first year. It says that people who actively participate and meet certain requirements, including being a real estate professional or spending more than 100 hours on an active short-term rental while investing the most time in the property, may be able to apply losses against salary income. The Reel also identifies loan interest and property-related expenses as deductions that can reduce rental gains and potentially create losses. It notes that depreciation may be recaptured when the property is sold. A 1031 exchange may allow the money to be invested in other properties with similar characteristics, subject to finding the property within 45 days and closing in less than six months, thereby deferring the tax. The Reel says a tax preparer should provide advice about these strategies.
Reel transcript
English version
Are you tired of paying the IRS a lot? Whether you have a salary with good income, whether you have a 1099, own a business, or are self-employed. Well, through real estate there are six strategies that I will talk to you about quickly that you can use, and you can contact me to go into more detail. First, depreciation. A residential property, for example, while you are renting it, can be depreciated over 27.5 years on a straight-line basis. That makes the rental income remain cleaner for you because you are going to subtract depreciation and expenses, and the income will remain net for you while, accounting-wise, very little profit or even a loss remains. The second is accelerating that depreciation. If you have the property, for example, as a short-term rental, you can accelerate depreciation and obtain something called bonus depreciation through a cost segregation. This means that from a property you purchase, you can depreciate approximately 25% in the first year. And the third mechanism, if you actively participate and meet certain requirements, considering yourself a real estate professional or having an active rental, such as a short-term rental, and you put in more than 100 hours and are the person who has invested the most time in that property, you can even deduct that against your salary. Fourth alternative, interest. When you take a property with a loan, that interest is also deductible. So it helps the rental profit keep decreasing and become a loss, and if you meet those requirements, you can transfer those losses to your salary income, for example, and thus pay much less in taxes. Fifth, all the expenses you have related to the property can be deducted there, and it becomes like a business. When you generate those depreciation benefits and sell the property, they recapture the depreciation you gained. So one says, wow, it was not that attractive. But the sixth is a 1031 format, in which you invest that money in other properties with, let's say, similar characteristics. They have some requirements: you have to find the property within 45 days and close in less than six months, but it can be done; many people do it, and that causes the tax to be deferred, so in the end you never paid it or you inherit it, and that is where the greatest benefit is obtained. Any questions about this, a tax preparer is the person who should advise you, but we can have an initial call to tell you more or less what each one is about.
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