A Beginner’s Guide to Advanced Tax Planning for Your Next Property Investment

Rosanne Jones

06/14/22

Investing in real estate is a smart move, but investors can reap more benefits by learning how to conduct advanced tax planning before buying. Learning these strategies is now crucial because, as Seattle's top real estate professionals outlines, this year will be particularly favorable for investors. The CEO of John L. Scott Real Estate explains that this is because buyers are planning to enter the real estate market this year before mortgage interest rates further increase.

The real estate market is ripe with possibilities this year, so you need to master advanced tax planning strategies to make the most of these opportunities. With that in mind, here are some of the advanced strategies you need to learn about before you invest in real estate/for your property investments:

Why Advanced Tax Planning is Important This Year

Understanding tax planning strategies is always a sound idea for an investor, but with recent changes to real estate taxes in Washington, it’s even more essential. Now that real estate excise taxes (REET) in Washington are based on a home’s sales price, properties valued between $1.5M and $3M are subjected to a 2.75% rate. Meanwhile, homes valued above $3M are paying more REET under the new system, which charges as much as 3%.

Given that REET rates have increased, advanced tax planning strategies can greatly benefit real estate investors that are looking for tax payoffs. This is an opportunity you don't want to miss out on, especially now that the national debt of the U.S. is increasing.

You need to pay attention to news surrounding national debt, as AskMoney’s explainer on the debt’s impact highlights that everyday Americans will be subjected to tax increases to pay off these debts. Since the US government racked up nearly $27 trillion in debt in 2020, the article warns that more Americans will be subjected to higher tax brackets in the coming years.

However, your knowledge of advanced tax planning strategies can help minimize these increases over time. For example, IRS-certified real estate professionals can reap the benefits for their businesses and more by deducting their business expenses, losses, and property depreciation from their taxable income. Even regular property investors can offset their rental income or capital gains, making advanced tax planning a crucial portion of their investment strategy.

3 Advanced Tax Planning Strategies for Your Next Real Estate Investment


1031 Exchanges

Eyeing a new property? You can enjoy a deferred tax break when buying and selling a property through the 1031 exchange.

While the 1031 exchange can be quite complicated, CNET's article on capital gains taxes shows that you can defer the payment of your taxes once you sell your property and purchase a similar one within a 45-day window. You can thus avoid having to pay your capital gains, depreciation recapture, and even net investment income taxes in the same period as the transaction.

Incorporation

Sole proprietors and startup founders can mitigate US estate tax concerns through an incorporation strategy. If you own an incorporated business, you can get lower tax rates by keeping your real estate within the company structure.

While there are a lot of accounting charges involved in establishing a corporation, this can prevent you from risking your private wealth in case of any losses. On top of that, incorporation helps you save your profits, since your taxes will fall under small business tax rates instead of personal tax rates.

Opportunity Zones

Real estate investors can boost local neighborhoods while earning federal tax breaks by simply investing in opportunity zones. There are about 8,700 opportunity zones in the US, and this includes several areas within Washington.

If you’re interested in enhancing Washington communities, Bellevue Reporter points out that investing in opportunity zones can add a significant percentage to your profits. Even Seattle-based Gardner Global is working on an opportunity zone project to earn profit while supporting Washington communities.


Washington State is ripe for real estate investment opportunities. But now that real estate taxes are increasing, investors must master tax planning strategies like the above to minimize losses and increase their profits.

 

 

About the Author:

Rosanne James interest in lifestyle and real estate has led her to pursue a career in property blogging. She loves to write about the latest trends and hottest neighborhoods across the US in hopes that it could one day help readers snag their dream homes.

 

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