Real Estate Tax

Real estate is more than an income-producing asset; it can be a strategic component of a long-term financial plan. When aligned properly, property investments can support retirement goals, wealth preservation, and generational planning.

One of real estate’s strengths is its ability to provide diversified income streams. Rental income may supplement earned income or retirement distributions, offering flexibility and stability over time. Additionally, appreciation can contribute to long-term net worth growth.

Ways real estate supports long-term financial planning include:

• Generating retirement income through rental cash flow
• Providing tax-advantaged growth opportunities
• Acting as a hedge against inflation
• Supporting estate planning and legacy goals
• Offering leverage opportunities not available in other asset classes

Planning is essential to ensure real estate complements other investments rather than creating imbalance. Concentrating too much wealth in property may reduce liquidity, while insufficient diversification can increase risk.

Liquidity planning is particularly important. Real estate is not easily converted to cash, so investors must ensure they have access to liquid assets for emergencies, opportunities, or lifestyle needs.

When integrated thoughtfully, real estate can strengthen long-term financial plans by providing income, stability, and growth. Regular reviews help ensure that property investments continue to align with evolving goals and market conditions.

You only have to look at the number of home remodeling shows on television to understand just how many people enjoy watching others upgrade their living spaces. These popular home remodeling shows have inspired many people to try their own hands at various remodeling projects.

If you are interested in having work done on your living space or doing it yourself, you should understand that some remodeling and construction projects will enhance the value of your home as well as its appearance. Other remodeling projects may be on your wish list and make you happy but won’t materially affect the value of your home.

What projects will add to the value of your home? According to the “2023 Cost vs. Value Report” conducted by Remodeling, a leading trade publication/platform, the top five renovations that increase — or come close to increasing — home value are as follows:

HVAC Conversion

Switching out your fossil-fuel burning furnace to a more environmentally friendly alternative — an electric heat pump — is an expensive undertaking but easily recoups its cost. Typically, the cost of converting a 2,000-square-foot home to an electric heat pump is estimated to be $17,747, but the report notes that it adds about $18,366 to the home’s resale value — a 103.5% return on the investment.

Garage Door Replacement

A new garage door definitely enhances a home’s curb appeal and easily recoups its initial cost. The report found that removing and disposing a 16- by 7-foot garage door and replacing it with four-section doors with heavy galvanized steel tracks would cost $4,302 on average but would boost the home’s resale value by $4,418, a 102.7% return on investment.

Manufactured Stone Veneer

Stone veneer has grown in popularity amongst homeowners looking to craft a warm and welcoming feel to their homes’ exterior. It costs an estimated $10,925 to install 36 linear feet of sills, 40 linear feet of corners, an address block, and other materials, including water-resistant and corrosion-resistant barriers. However, homeowners will recoup 102.3% of the project’s cost if they put their home on the market.

Replacing an Entry Door

New front doors can help improve a home’s energy efficiency as well as enhance its appearance. Replacing an old entry door with a new steel one will cost an average of $2,214 but will increase your home’s resale value by $2,235, recouping 102.9% of its original cost.

Replacing Siding

Replacing a home’s siding is an expensive undertaking, but it is one project that delivers immediate eye appeal. New siding refreshes a house’s appearance and adds to the neighborhood’s overall desirability. The report looked at the costs of installing both fiber-cement siding and vinyl siding. It found that the average cost of installing 1,250 square feet with fiber-cement siding would run a homeowner $19,361. The homeowner would expect to recoup 88.5% of the cost of the project, or $17,129. Installing new vinyl siding would be less costly than fiber-cement siding. Siding for a 1,250-square-foot house would cost an estimated $16,348, and the homeowner could expect to get back around 94.7% of that total cost at resale.

Be aware that labor costs vary from state to state and from community to community. The cost of materials fluctuates, sometimes considerably, depending on inflation, supply chain issues, and other economic and political forces.

If you’re a real estate investor, saving money on your taxes can be just as crucial to your bottom line as the deals you make daily. While numerous tax strategies that you can implement to save on taxes exist, a few of them are more valuable than others. Here, we discuss four of the top tips for saving money on real estate taxes.

1. The 1031 Exchange

A 1031 exchange is a way for real estate investors to defer capital gains taxes when selling an investment property by reinvesting their profits in a replacement property. This is also called a like-kind exchange. It is essentially a swap of one investment property for another. “Like-kind” refers to the fact that the properties in the exchange must be similar, and the exchange property must be of equal or greater value than the property sold. Because it is rare for an even property swap to occur between parties, the most common type of exchange is the delayed “forward” exchange. In this case, the sold property funds are sent to a qualified intermediary. The intermediary holds the transaction funds from the sale of the first property until they are transferred to the seller of a replacement property.

2. The Business Tax Deduction

The expenses that you incur from owning a property are deductions that can be advantageous for part- and full-time real estate investors. Qualifying expenses include mortgage interest, insurance, fuel used for travel to and from the property, phone, internet, home office, etc. If some expenses are shared for business and personal use (such as your phone or internet), be sure to divide the expenses accordingly and only deduct what is used for your business.

Also, note that the allowable expense deductions must be ordinary (common in your field) and necessary (aid you in conducting business).

3. Long-Term Capital Gains

When selling a property for profit, a capital gains tax can be assessed. If you sell a property in the short term (within one year of purchasing it), the profit you make from the sale is considered income. This can put you into a higher tax bracket and increase taxes that you owe significantly (the short-term capital gains tax can be as high as 35 percent!). However, you can avoid a large tax bill due to selling an investment property if you can hold onto the property until after the first anniversary of purchasing it. That’s because the long-term capital gains tax rate is lower than the rate on income tax that applies for short-term gains (the long-term capital gains tax usually tops out at 15 percent, depending on tax filing status and income).

4. Depreciation Losses

Depreciation, the gradual loss of an asset’s value, allows you to take a tax break for property wear and tear over time. By deducting depreciation of real estate investments on your taxes as an expense, you lower your taxable income. This could potentially lower your tax liability.

According to the IRS, the expected life of a parcel is 27.5 years for residential properties and 39 years for commercial properties. The depreciation deduction for the entire expected life of a parcel can be taken. For example, if you buy a house valued at $300,000 (value of the structure, not the land it sits on) as an investment property to rent, you divide that value by 27.5 years, which gives you $10,909. That is the amount you can deduct in depreciation each year on your taxes.

Be aware that if you ever sell the property, you will have to pay the standard income tax rate on the depreciation you claimed (Note: this is “depreciation recapture” and can be avoided with strategies like a 1031 exchange discussed in point 1.) You can also possibly depreciate improvements you make to investment properties like replacing the roof or similar significant upgrades.

Speak to your accountant about these money-saving strategies, as well as other potential ways to keep more profit in your pocket when conducting your real estate investment business.

Discover how our accounting services and tax strategies can benefit your real estate business. Call us now at 703-971-2422 or request a free consultation to find out what we can do for you.

The majority of sales and purchases of property are usually settled by the buyer paying the seller an agreed on lump sum up front. However, there are circumstances when it makes sense to structure the sale of property so that payments will be received in installments over a number of years. What are those circumstances and what are the tax consequences of such transactions?

When an Installment Sale Makes Sense

An installment sale can be helpful if a potential buyer of your property lacks sufficient cash to pay the full purchase price in a lump sum. The interested party suggests an installment sale in which he or she makes a partial payment now and pays the balance over several years, with interest.

An installment sale may be something to consider if you want to sell a business or a rental property but there has been limited interest from prospective buyers. It can also be an attractive option for tax planning purposes. With an installment sale, you spread out the capital gain (and the tax liability) on the sale over the years you receive payments rather than reporting the income in a single year. By spreading out the income, an installment sale may help keep your income within a desired tax bracket and reduce your potential exposure to alternative minimum tax, net investment income tax, and tax on any Social Security retirement benefits you are receiving.

The Tax Rules

The rules on installment sales are complex and can trap the unwary. Since you receive payments over more than one tax year, you can defer a portion of any taxable gains realized on the sale. Your total gain on an installment sale is generally the amount by which the selling price of the property you sold exceeds your adjusted basis in that property. The selling price includes the money and the fair market value of any property you received for the sale of the property, any of your selling expenses paid by the buyer, and any existing debt on the property that the buyer assumed or paid.

When you report the sale on your tax return, you include in income each year only the part of the gain you receive or are considered to have received. You do not include in income the part of the payment that is a return of your basis in the property. You have to report interest on an installment sale as ordinary income. Essentially, an installment sale allows you to pay your taxes over time as you collect from the buyer.

What’s Not Allowable

The installment sales method is not available for sales of publicly traded securities and certain other sales. You have the option of electing out of installment sale treatment and reporting your entire gain in the year of sale. Electing out may be advantageous under certain circumstances: for example, if you have a large capital loss that can offset your entire capital gain in the year of the sale.

Before entering into an installment sale, we recommend that you consult with a tax professional.

Discover how our accounting services and tax strategies can benefit your real estate business. Call us now at 703-971-2422 or request a free consultation to find out what we can do for you.

Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

From small businesses to individuals, our Fairfax, VA CPA firm applies the same level of dedication to every client, with sound tax strategies and unsurpassed attention to detail. Call our office now at 703-971-2422 to discover how we can decrease your tax obligations. We welcome new clients and offer a free consultation so contact us today.