Optimism is the word for real estate investors these days. As sales of existing homes continue to rise, and interest rates for home loans stay relatively low, some investors are poised to enjoy their best year in quite some time. But if there is one thing that can derail an investor’s success, it is tax liability.
This is because real estate investors may not be taxed in the same way compared to other self-employed business owners. Essentially, a business owner running a hair salon, for example, may pay 15 percent in taxes on business income, and possibly 15 percent in self-employment taxes. At the same time, a real estate investor may fare better after applicable deductions and depreciations if much of his or her income stems from rents and short term capital gains.
However, an investor’s tax burden may change substantially if he or she has separate personal income from a w-2 job. Basically, the larger this income is, the less effective the real estate deductions and depreciations will be, and he or she could end up owing money.
So the operative question is: should investors plan to make less money? The general answer is: it depends. This is where careful tax planning can maximize the financial benefits that come with a successful real estate investment portfolio.
Whatever the strategy you envision, consulting an experienced real estate attorney could help you save money on next year’s tax return. If you have additional questions, we invite you to contact us.
The preceding is provided for informational purposes only and is not legal advice.