...
Maximize Your Savings: 11 Last-Minute Tax Moves for Investors Before the Year Closes
What are some strategic tax-saving actions that real estate investors can take at year-end to optimize their investment portfolio?
For real estate investors, year-end is not just about closing deals but also about making strategic decisions that can significantly reduce your tax liability. Failing to prepare could result in missed tax benefits that might otherwise enhance your investment portfolio.
What strategies can mid-income investors use before December 31 to maximize tax savings?
To make the most of available tax savings and position yourself for a stronger financial future, here are some effective strategies to implement before December 31, particularly for mid-income investors.
- Utilize Accelerated Depreciation
Depreciation offers a substantial tax advantage to real estate investors. If you own rental property, conducting a cost segregation study can help by separating your property into components that can be depreciated faster, leading to larger deductions early in your ownership.
Even if the study is not complete by year-end, closing on the property before December 31 allows you to benefit when filing your 2024 tax return. If you don’t own property yet, you can still participate by investing in real estate deals planning a cost segregation study before year-end.
Action Point: Discuss a cost segregation study with your CPA or explore real estate deals closing by December 31.
- Implement a 1031 Exchange
Selling a property this year? Consider using a 1031 exchange to defer capital gains taxes by reinvesting proceeds into another property. This allows you to avoid immediate taxes and reinvest your capital into new opportunities.
For example, selling a rental property for a $100,000 gain without a 1031 exchange could result in a $20,000 tax bill. Through a 1031 exchange, you defer that tax and keep your money working for you.
Action Point: Consult your CPA about whether a 1031 exchange is suitable for you before selling any property.
- Prepay Expenses
A straightforward way to lower your taxable income is by prepaying expenses such as property taxes, insurance premiums, or repairs for your rental properties. Doing so before year-end allows you to claim these deductions in 2024, particularly helpful in high-income years.
Action Point: Review your upcoming expenses and prepay them before December 31 for immediate deductions.
- Take Advantage of the Qualified Business Income (QBI) Deduction
If you own real estate through an LLC, S-Corp, or as a sole proprietor, you may qualify for the Qualified Business Income (QBI) deduction, which allows you to reduce your taxable income by up to 20%. Eligibility depends on your income, so check with your CPA to maximize this deduction.
Action Point: Speak to your CPA to confirm if your real estate business qualifies for the QBI deduction and how to optimize it.
5. Shift Income to Your Children
If your children are in a lower tax bracket, shifting income to them can reduce your overall tax burden. For 2024, children can earn up to $14,000 without paying federal income taxes. You can hire them for tasks related to your real estate business and deduct these wages, while also contributing to their future through a Roth IRA.
Action Point: Set up a system to compensate your children for their work and consult your CPA for compliance with tax regulations.
- Maximize Your Health Savings Account (HSA) Contributions
If you have a high-deductible health plan, an HSA is a great tool to reduce your taxable income. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. In 2024, you can contribute up to $4,150 for individuals or $8,300 for families, with an additional catch-up for those over 55.
Action Point: Maximize your HSA contributions by December 31 to lower your taxable income.
- Maximize Flexible Spending Account (FSA) Contributions
Contributing to an FSA for medical or dependent care expenses allows you to use pre-tax dollars for eligible expenses. Keep in mind the “use-it-or-lose-it” rule—unused funds may be forfeited, so ensure you spend your contributions before year-end.
Action Point: Review your FSA contributions and expenditures to maximize your tax savings.
- Harvest Capital Losses
If some of your investments have lost value, selling them before year-end can allow you to offset gains in other parts of your portfolio. This can reduce your taxable income and help you carry over losses for future years if they exceed your gains.
Action Point: Evaluate your portfolio and sell underperforming assets before December 31 to leverage capital loss harvesting.
- Explore Tax Credits
Tax credits directly reduce your tax liability, making them highly valuable. Consider credits like the Child Tax Credit, Saver’s Credit for retirement contributions, or education-related credits like the American Opportunity Tax Credit. These are especially relevant for mid-income earners.
Action Point: Work with your CPA to identify tax credits you qualify for to further reduce your 2024 tax liability.
10. Make Charitable Donations
Contributing to a qualified charity is an excellent way to support causes you care about while also receiving a tax deduction based on the fair market value of donated assets.
Action Point: Make your charitable contributions by December 31 to benefit from the deduction this year.
- Contribute to an IRA
Contributions to a traditional IRA can reduce your taxable income, while a Roth IRA allows for tax-free withdrawals in retirement. In 2024, you can contribute up to $6,500 (or $7,500 if you’re 50 or older). Consider how this fits into your long-term financial strategy.
Action Point: Ensure you make IRA contributions by the tax filing deadline to reduce your taxable income.
Final Thoughts
Implementing these tax-saving strategies before year-end can help you significantly reduce your 2024 tax liability. Whether you’re maximizing deductions, leveraging credits, or planning future investments, taking action before December 31 is crucial. Work with your CPA to review your options and make the right moves for a strong financial future.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Maximize Your Savings: 11 Last-Minute Tax Moves for Investors Before the Year Closes
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“