3 Top Tax Deductions for Real Estate Investors

The past year has seen a flurry of legislative and regulatory measures intended to assist businesses and individuals with COVID-19 challenges. Given the volume of ensuing guidance from the IRS and Treasury, business owners and investors are sorting through the best tax strategies to employ for 2020 and 2021.

The enactment of the Coronavirus Aid, Relief and Economic Security (CARES) Act enhanced some of the tax deductions that real estate investors can take to offset tax liabilities for future property investments. At this time of economic instability and political change, real estate investors should remain focused on three of the best tax deductions available to them.

1. Cost Segregation

Cost segregation refers to the process of identifying and classifying subcomponents or units of property, including tangible property, land improvement and the building and its structural components. Many real estate investors are familiar with cost segregation but may not know whether they can take advantage of accelerated depreciation for valuable cost savings. In other words, your real estate may be eligible for a cost segregation study and you may not even know it. If so, you could be leaving money on the table.

Tax Law Changes Affect Cost Segregation

Bonus depreciation enables investors to deduct a percentage of the cost of their assets the first year they are placed in service. Thanks to changes in the tax law, bonus depreciation is 100% through tax year 2022, and used property is now eligible for bonus depreciation. The CARES Act sweetened this tax deduction with a new five-year carryback option.

Take Advantage of a Cost Segregation Study

The objective of the cost segregation study is to identify items for faster depreciation as personal property (five-year or seven-year) or land improvements (15-year) as opposed to real property, which depreciates over 27.5 years for residential and 39 years for commercial. Even if your building was placed in service in prior years, it may qualify for greater deductions. A qualified engineer will use blueprints and cost reports to determine whether property can be reclassified for tax benefits.

By deferring tax liabilities, real estate investors and building owners can use cost segregation to:

  • Leverage your real estate investment to scale their business
  • Pursue other opportunities that offer significant returns
  • Invest in other areas of the business for business growth

Request a Free Benefit Analysis from ETS to identify an estimated benefit and ensure a cost segregation study makes sense for your property.

2. Opportunity Zones

The Opportunity Zones Tax Incentive was included as part of the Tax Cuts and Jobs Act (TCJA) of 2017 to provide real estate developers and investors the opportunity to defer capital gains and help develop distressed communities through qualified opportunity zones (QOZs) for temporary tax deferral until 2026.

Real estate investors were able to capture the full tax benefit by making investments before the end of 2019, but there still could be a good opportunity to defer capital gains and take advantage of this powerful incentive. Investors receive a temporary tax deferral until 2026 by rolling gains into a qualified opportunity fund (QOF), the investment vehicle that will own this eligible property. Next, they receive a step up in basis. After five years, investors receive a basis increase of 10%, and after two additional years (seven total), investors receive an extra 5% basis increase for a total of 15%.

Tax Law Changes Affecting the Opportunity Zones Tax Incentive

As part of COVID-19 relief legislation, the IRS in June provide relief to QOFs, QOZ businesses and their investors. The IRS extended certain deadlines and working capital suspensions due to pandemic-related interruptions that have delayed project financing, approvals and construction activities. For example, the 180-day investment period was extended, which means investors can avoid current taxation as long as they invest the amount of qualifying capital gains to be deferred in a QOF. Overall, the IRS is providing investors with greater flexibility in making QOF investments.

With a qualified specialty tax advisor and a plan in place, real estate investors can help economically distressed communities while providing investors great tax-advantaged investment ideas. Learn more.

3. Section 1031 Exchanges

The TCJA eliminated 1031 treatment for the exchange of personal property that took place after Dec. 31, 2017. However, properly structured “like-kind” exchanges of real property were left in place. That means real estate investors can avoid paying capital gains taxes when they reinvest the proceeds from the sales into a property of like-kind and equal or greater value within a certain time frame.

Biden Administration: Potential Elimination of 1031 Exchanges for High-Income Investors

President-elect Joe Biden’s proposed tax plan suggests his administration would eliminate this tax-savings tool for investors with income greater than $400,000. Property owners and investors will be carefully watching efforts to eliminate the 1031 exchange.

Our specialty tax experts can answer your questions and work closely with you to ensure you are taking advantage of every tax benefit that will help your business succeed. If you have questions, just give us a call at (800) 236-6519.


Heidi Henderson

Heidi Henderson

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