Understanding Passive Tax Liability
Passive tax liability refers to taxes businesses and individuals are obligated to pay on incomes derived from passive activities such as real estate investments. If you want to plan your taxes effectively and minimize your overall tax obligations, recognizing and managing this tax liability is very important.
Strategies to Reduce Passive Tax Liability
You can retain more of your income by utilizing several strategies to help reduce your passive tax liability. One of the powerful strategies is leveraging real estate losses to offset passive gains.
Utilizing Real Estate Losses to Offset Gains
As a passive real estate investor, you can reduce your tax burden by using losses from your properties to offset your passive income. Depreciation is one of the primary methods of generating such losses. Depreciations help you lower your taxable income by letting you deduct the cost of your investments over time. The Tax Cuts and Jobs Act, published in November 2017, introduced a new benefit called bonus depreciation. Investors can now deduct a significant portion of the cost of qualified property improvement in the first year, thanks to the provisions of the Tax Cuts and Jobs Act.
Taking Advantage of Bonus Depreciation
Bonus depreciation is a highly valuable tax incentive that gives investors the ability to deduct up to 60% of the cost of qualifying property improvements in the first year of ownership. When you take advantage of bonus depreciation, you tremendously improve your tax savings and significantly reduce your passive tax liabilities.
Partnering with Real Estate Investment Experts
It can be very advantageous for you to partner with real estate investment firms that specialize in maximizing tax benefits. For example, companies like Fort + Home Capital co-own properties with their investors, ensuring that tax benefits from depreciation and bonus depreciation are fully utilized.
Benefits of Partnership
Shared Ownership Benefits: When you co-own properties with an investment firm, you can be sure that the tax benefits of depreciation and bonus depreciation are fully maximized.
Tax incentives: You can take full advantage of IRS-approved tax incentives and reduce liabilities by leveraging the expertise and resources of a specialized investment firm.
Diversification and efficiency: Investing with experts helps you diversify your portfolio while ensuring tax efficiency, optimizing both returns and tax savings.
Planning for Tax Efficiency in 2024
It's very important to start planning now if you intend to reduce your tax liability in 2024. An investment firm can help you maximize your savings through the development of a comprehensive tax planning strategy.
Early planning: If you intend to utilize all available deductions and incentives, you must strategize your tax planning early in the year.
Collaborative Approach: To ensure seamless integration of tax strategies, your personal accountants may need to work with the investment firm's accounting team.
Maximize savings: Planning ahead lets you optimize your investment returns and minimize your tax liabilities.
Consult with Tax Professionals
Even though investment firms help to provide valuable strategies for reducing tax liabilities, you need to understand that they aren't tax professionals. We strongly recommend that you carry along your accounting and legal team by keeping them up to speed with your investment decisions. This will help them provide professional guidance to keep you informed and compliant with all tax laws and regulations.
Conclusion
For you to develop an effective financial plan, understanding and managing your passive tax liabilities is crucial. You can significantly enhance your investment returns and reduce your tax burden by partnering with real estate investment experts and leveraging strategies like depreciation and bonus depreciation. If you are looking to maximize your financial benefits and improve tax efficiency in 2024, you need to start planning today. Always try to consult with your tax professionals if you intend to adopt any of these strategies to keep you in full compliance with tax laws and regulations
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