Folsom Property Management Blog

Tax Preparation for Real Estate Investors - A Guide

Tax Preparation for Real Estate Investors - A Guide

Tax season is here and real estate investors are compiling important documents. Property owners pay several different types of taxes that they need to prepare for.

In the 2022 tax season, the U.S. government collected more than $2.6 trillion in income taxes. Rental income and capital gains make up a significant percentage of this amount.

As an investment property owner, you need to put in some preparation work for your tax filing. Read on to learn real estate planning strategies for the upcoming tax season.

Expense Tracking

Writing off your annual expenses is one of the major benefits of being a property owner. There is a lot of work that goes into managing a rental property or selling a home.

You may hire a property management company to manage the rental for you. Rental property owners are also responsible for maintenance costs. If you run a short-term vacation rental, you likely have cleaning and advertising expenses as well.

Other major expenses include property taxes and home insurance. You may deduct a home office used to manage the rental.

All of these expenses add up and are subtracted from your revenue for tax purposes. Next, the tax rate applies to the remaining net income.

A property management company can help you track these expenses. They have software that calculates expenses and prints supporting reports for your tax submittal.

Document Collection

Every tax filer is subject to an IRS audit if there is a discrepancy in the submission. For this reason, you want to ensure an accurate and supportable filing.

The best way to do this is to collect and preserve all your tax documentation. For example, you will receive property tax statements from your city or municipal government. If you still hold a mortgage, the lender sends a 1098 form detailing the interest or points you paid.

Opportunity Zones

The 2017 Tax Cuts and Jobs Act set up opportunity zones for real estate investors. Here, you can strategically defer taxes on capital gains.

The longer you hold the property, the more tax benefits become available. By year ten of holding a property, the capital gains may become tax-free.

There are many opportunity zones in California. You can search your Folsom property address to see if these benefits apply to you.

Set Up a Section 1031 Exchange

Some real estate investors buy and sell properties more often than others. If you sell an investment property and replace it with a like-kind asset, you may qualify for Section 1031 of the tax code.

This means you can avoid capital gains on the transaction. There are time constraints you must meet to qualify. You have to identify a replacement property within 45 days and acquire it within six months.

Your Guide to Paying Taxes on an Investment Property

You are now ready for tax season. The tax code encourages real estate investment through exclusions and deductions.

Residential Equity Management has decades of experience helping Folsom residents minimize their tax liability. If you need help preparing to pay taxes on an investment property, contact us at Residential Equity Management to speak with an expert.