Tax Season Tips: How to Save Tons of Tax from Real Estate (Florida Edition)
As the tax season looms, you probably are burying yourself in tons of paperwork. So, we’re just going to be really quick and straight to the point: how to minimize property tax from real estate, with tips specially for Florida state!
Investing in real estate continues to be one of the best ways to build wealth and cut taxes. Benefits include the ability to recover the cost of income-producing property through depreciation, to use 1031 exchanges to defer profits from real estate investments, and to borrow against real estate equity to make additional investments or for other purposes.
Additionally, homeowners can benefit from the personal-residence exemption, which shields profits on the sale of a personal residence from capital gains taxes, as well as the deduction for mortgage interest. Read on to find out whether one or a combination of these strategies is right for you.
Are you interested in becoming a real estate investor but haven’t purchased your first property? Consider Ackley Platinum Group, the leading agent providing a concierge approach to real estate services to aach and every client which caters to high-end clients who demand personalized attention and exceptional service.
Current homeowners and potential real estate investors in the sunshine state have an excellent opportunity to strategically navigate the tax landscape and capitalize on savings. Scroll up to the end to find the tips tailored for those seeking to save on property taxes in Central Florida.
Hold Properties for More Than One Year
As a real estate investor, step one to saving money on taxes is holding properties for more than one year.
If you own an investment such as real estate property for less than one year and sell it for a profit, the profit is taxed at your normal income tax rate. If you own an investment for more than one year before selling, you can likely sell it at a capital gains tax rate – which at 15%, may be around half your normal rate. Plus, if you hold a property for more than a year, you can make more money by leasing the property and selling it after the value of the home has appreciated.
Own Properties in A Self-Directed Ira
If you’ve worked a W2 job, you’re likely acquainted with tax-advantaged retirement savings. 401(k) plans, individual retirement accounts (IRAs), Roth IRAs – everyone has a different strategy.
As a real estate investor seeking a tax break, you should be aware of the self-directed IRA. Self-directed IRAs are IRAs held by a custodian that allows investment into different assets, such as properties.
You will likely need to hire a custodian or trust company to administer your self-directed IRA and create an LLC or other legal entity to buy and own investment properties. This way, you can invest money into your LLC and then into your properties – all tax-free.
Defer Taxes with Incentive Programs
A “like-kind exchange,” according to Section 1031 of the tax code, allows property owners to defer paying taxes indefinitely by buying a similar property with their proceeds. Sometimes, the government develops a special tax code to incentivize investors. Let’s review the 1031 exchange and opportunity zones, two major real estate tax benefits.
1031 Exchange
1031 exchanges exist because the government wants to reward people who reinvest their real estate profits into new deals. As long as the new property you buy is of equal or greater value than the one you sell, the program lets you swap them for tax purposes. That means you can defer paying the capital gains tax on the sale of the first property.
You can use 1031 exchanges indefinitely. But, when you want to cash out your profits, you’ll have to pay any tax owed. There are a few different forms of the program available based on the timing of your purchase and sale transactions. Since the program can be complicated to navigate and take full advantage of, it’s wise to consult with a qualified financial professional.
Opportunity Zones
Designated by the US Department of Treasury, opportunity zones are low-income or disadvantaged tracts of land. The 2017 Tax Cuts and Jobs Act encourages investors to put their money into developing and economically stimulating these communities by offering tax breaks.
Alongside other real estate investors, you place your unrealized capital gains into a Qualified Opportunity Fund. Money from that fund goes toward improving the selected area.
If you play by the rules of the program, you can enjoy the following tax advantages:
Defer paying capital gains until 2026 (or until you sell your stake in the fund).
Grow your capital gains by 10% if you hold the fund for 5 years; 15% for 7 years.
Avoid paying capital gains entirely if you remain invested in the fund for 10+ years.
Deferring Taxes on the Sale of a Home
Gains from the sale of a taxpayer's primary personal residence are excluded from capital gains taxation up to $500,000 for married couples that file jointly and $250,000 for single individuals if the taxpayer has lived in the home for two of the last five years. In addition, should the gains from the sale of a taxpayer's primary residence be greater than those exclusions, the taxpayer may also invest that portion through a 1031 exchange.
Investors who live in areas where home values are appreciating can use a strategy of trading up to both build their personal wealth and minimize taxes at the same time.
Use Real Estate Tax Write-Offs
One of the biggest financial perks of this income stream is the real estate investment tax deductions you’re able to take. You get to deduct expenses directly tied to the operation, management and maintenance of the property, such as:
Property taxes
Property insurance
Mortgage interest
Property management fees
Cost to maintain and repair the building
Advertising expenses
Home office expenses
Closing costs
Travel and mileage
Be sure to keep detailed, accurate records and receipts so you can prove the expenses you claimed in case you’re audited by the Internal Revenue Service (IRS).
Depreciate Your Properties
Another paper expense real estate investors can take advantage of is depreciation. The IRS sets the lifespan of a residential building at 27.5 years, so property owners can deduct 1/27.5 of their property’s building value each year for the first 27.5 years they own the property.
For example, say you buy a property for $150,000, with the land valued at $50,000 and the building valued at $100,000. Each year for the next 27.5 years, you can deduct $3,636 for depreciation: $100,000 ÷ 27.5 = $3,636.
You can also depreciate capital improvements to the property. For example, if you install a new roof for $8,000, that $8,000 can also be depreciated over 27.5 years.
That’s the good news. The bad news is that when you sell the property, you’ll owe taxes for “depreciation recapture” on all profits you had previously avoided paying taxes on through depreciation. Of course, if you never sell, you never owe those taxes.
Tips tailored for those seeking to save on property taxes in Florida.
Homestead Exemption: A Florida Resident's Boon
Florida offers one of the most generous homestead exemptions in the country. For homeowners who make their property their permanent residence, the homestead exemption provides a significant reduction in property taxes. To qualify, the property must be the owner's primary residence and must have been established by January 1 of the tax year. The exemption includes a standard $25,000 deduction, with additional exemptions for assessed values between $50,000 and $75,000. Ensuring that your property is properly designated as a homestead is a foundational step in reducing your property tax burden.
If you're moving within the state, you can transfer the savings from your previous homestead exemption to your new property, subject to certain conditions. This portability allows homeowners to maintain accrued savings even when upgrading or downsizing.
Save through 'Save Our Homes' Assessment Limitations
Florida's 'Save Our Homes' amendment limits the annual increase in assessed value for homesteaded properties to a maximum of 3% or the Consumer Price Index (CPI), whichever is lower. This can result in substantial long-term savings, especially in a region experiencing consistent property value appreciation. It's crucial to understand the intricacies of this limitation and how it applies to your specific situation, as there are circumstances where the limitation can be reset.
Consider Agriculture Classification for Larger Properties
For those with larger properties, consider exploring agricultural classification for part of your land. Florida's agriculture classification can lead to substantial property tax savings. To qualify, you need to meet specific criteria related to the size and use of your property for agricultural purposes. This can be a nuanced process, and consulting with a tax professional is advised.
Capitalizing on Florida's Lack of State Income Tax
Florida is one of the few states without a state income tax. For real estate investors, this means that you can potentially save on both state income tax and property tax, making the state an attractive option. Consider structuring your investments with this tax advantage in mind, potentially through entities that align with your long-term financial goals.
Explore Exemptions for Veterans and Seniors
Florida provides additional property tax exemptions for certain groups, including veterans and seniors. Veterans with service-related disabilities may qualify for substantial exemptions. Similarly, seniors may be eligible for additional exemptions based on age and income. Understanding and applying for these exemptions can result in significant savings.
In Central Florida, where real estate markets are vibrant and property values are on the rise, strategic tax planning is essential. Leveraging Florida's unique tax advantages, such as the homestead exemption, 'Save Our Homes' limitations, and targeted exemptions for specific groups, can lead to substantial long-term savings. However, it's crucial to navigate these strategies with care and seek professional advice to ensure compliance with state regulations. As the tax season approaches, homeowners and investors have the opportunity to not only bask in the Florida sun but also to bask in the glow of considerable tax savings.
TALK TO US ABOUT YOUR PROPERTY NEEDS
You might be seeking opportunities to add investment property into your investment portfolio, we are here to help! Please contact Ackley Platinum Group professionals for your real estate needs at 407-973-7355.