Effective Tax Planning for Real Estate Professionals

The real estate industry is one of the largest industries in Washington state. Therefore, real estate professionals have to deal with a huge amount of money. As a result, they also have to deal with several tax-related tasks, which can be very challenging without sufficient knowledge. However, the good thing is that they can seek help from professionals, like a real estate accounting firm in Seattle, Washington.

While hiring a professional may look like an upfront expense, it actually helps you save a significant amount of money in terms of tax optimization. Therefore, being a real estate professional, you should always hire a highly experienced and skilled professional accountant.

Different types of real estate taxes

Depending on the tax regulations of the state you live in, you may have to pay multiple taxes as a real estate professional. Following are some of the taxes that real estate professionals are commonly required to pay. 

  • Income tax: Like every other resident of the United States, a real estate professional also has to pay income tax on their annual earnings as per federal and state regulations.
  • Capital gains tax: The sale of any asset in the US attracts capital gains tax. Therefore, the sale of property also attracts capital gains tax, which has to be paid by every real estate professional for the sale of each property they own. Presently, the long-term capital gains tax is applicable at the rate of 0%, 15%, and 20%. However, it is pertinent to mention that the capital gains tax is applicable only to the profit earned from the sale of property and not to the entire sale value.
  • Property tax: Property tax is calculated on the basis of a property’s assessed value, which can widely vary across different cities and states in the US. A real estate professional has to pay property tax on the properties they own. Property tax receipts are the largest contributor to the revenues earned by most of the local governments across the US.
  • Transfer tax: The transfer of title or ownership of a property from one entity or individual to another attracts transfer tax. A local, state, or federal government can impose it. Some states also consider transfer tax as an excise tax.
  • FICA Tax: The income of real estate professionals may be subjected to the Federal Insurance Contributions Act (FICA) tax. The receipts of this tax are used for things like Social Security and Medicare.

Understanding the importance of real estate tax planning

Tax planning is essential for real estate professionals for various reasons. Some of the most prominent ones are as follows.

  • Tax planning ensures that you are compliant with local, state, and federal tax regulations.
  • Tax planning ensures reduced tax liability as it will help you utilize exemptions, deductions, and other benefits.
  • Tax planning provides a healthy flow of money, which ensures economic stability.
  • Tax planning allows you to set realistic financial goals.

Tax deduction options for real estate professionals

Deductions allow you to minimize the tax payable. As a real estate professional, you can itemize the following deductions to save taxes.

  • You can deduct various fees like bank fees, interest fees, notary fees, etc. under General Expenses.
  • You can deduct the car and truck expenses (either the standard mileage rate or actual vehicle expenses) under the depreciation section.
  • The fees charged by lawyers, photographers, inspectors, tax preparators, etc., can also be itemized under deductions.
  • You can use Form 1099-NEC to claim a deduction for the amount you paid for work to someone who is not your employee. 
  • Expenses incurred on marketing, like billboard ads, newspaper ads, flyers, signs, etc., can also be itemized for deduction under general expenses as advertising expenses. 
  • You can itemize the expenses incurred on the purchase of assets like furniture, computers, printers, cameras, etc., for business operation purposes.
  • You can itemize expenses incurred in a home office, which are the expenses you incurred in a part of the house that you use for business purposes only. 
  • Office rent, business insurance premium, basic office expenses, etc. expenses can also be itemized for a tax deduction.

Effective tax planning strategies for real estate professionals

Some of the basic tactics that a real estate professional can employ for effective tax planning are as follows.

  • You can save on taxes by deferring your income while accelerating expenses.
  • You can contribute to tax-advantaged accounts like 401(K), IRA (individual retirement account), HSA (health savings account), etc.
  • Benefit from the depreciation by using cost segregation studies and bonus depreciation.
  • Use tax credits to further reduce your payable taxes.

Final takeaway

Efficient and effective tax planning can save real estate professionals thousands of dollars. However, optimizing taxes requires a certain level of expertise and experience. Therefore, it is always recommended to hire a real estate accountant to manage your taxation and other financial tasks.

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