How to reduce your tax burden from investment properties in the US

The US tax code can be difficult to navigate. Thankfully, there are some actions you can take that will help reduce your tax burden an increase the return on your investments.

Utilize Depreciation Deductions

Buildings and structures can be depreciated at specific rates set by the IRS. Investors can deduct depreciation from rental income, lowering their taxable income and overall tax liability.

Take Advantage of 1031 Exchanges

A 1031 exchange allows you to defer paying capital gains taxes when selling an investment property, as long as you reinvest the proceeds into another "like-kind" property within specific time limits. This allows your investment to grow and compound at a much higher rate.

Use a Self-Directed IRA

You can invest in real estate through a self-directed IRA, allowing rental income and capital gains to accumulate tax-deferred or tax-free (in the case of a Roth IRA). However, there are strict rules to follow.

Hold Properties for Over a Year

If you hold a property for more than one year before selling, any gains are taxed at the lower long-term capital gains rate instead of being taxed as ordinary income.

Maximize Deductible Expenses

Deduct all allowable expenses related to your rental properties, such as mortgage interest, property taxes, insurance, repairs, and property management fees. This reduces your taxable rental income.

Consider Forming an LLC or Corporation

Forming an LLC or corporation can provide additional tax benefits, such as allowing you to take the 20% qualified business income deduction and potentially avoiding self-employment taxes. By strategically utilizing these methods, real estate investors can significantly reduce their tax liabilities and keep more of their hard-earned profits from rental properties and capital gains.