Paying taxes on capital gains can be a stressful and frustrating experience for investors, especially when those taxes are unexpected. With the October 15th extension deadline for 2023 tax payments quickly approaching, many investors are feeling the pressure of their current tax obligations. However, with tax planning, you can avoid these surprises when it comes to 2024 taxes.
One of the most effective ways to reduce your tax liability is through real estate investment. Real estate offers a variety of powerful tax strategies, including bonus depreciation, which can help you offset gains and keep more of your money working for you. Here’s how you can take advantage of this strategy for the 2024 tax year.
What is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows real estate investors to accelerate their depreciation deductions, offsetting gains from other income in the process. Normally, depreciation is spread out over the lifespan of the asset—27.5 years for residential properties and 39 years for commercial properties. But with bonus depreciation, you can deduct a large portion of the property’s value up front in the first year of operation or what the IRS calls “Placed in Service” .
For 2024, bonus depreciation is set at 60%, meaning investors can capture 60% of the property’s depreciation in the first year. This immediate deduction can significantly reduce your taxable income and provide an opportunity to reinvest more of your capital into additional assets.
What’s the Phase-Out Schedule for Bonus Depreciation?
The Tax Cuts and Jobs Act of 2017 introduced bonus depreciation as a temporary measure, with the goal of phasing it out over several years. Here’s the current phase-out schedule for assets placed in service:
For investments made in 2024, the rate is 60%, which is still a significant tax-saving opportunity. By locking in this deduction, you can offset gains, reduce your taxable income, and reinvest your capital for future growth.
How Bonus Depreciation Can Offset Gains
One of the greatest advantages of bonus depreciation is its ability to offset gains from other income, reducing your overall tax liability. Here’s how it works:
Depreciation deductions create “paper losses,” which can offset gains from other investments or passive income.
With bonus depreciation, you can take the majority of these deductions up front in the first year of ownership, rather than spreading them out over decades.
If you do not want to use the full deduction in the first year, depreciation losses can be carried forward to offset future gains. This is an excellent way to manage your tax liability in both the short and long term .
This type of tax planning gives investors the flexibility to manage their income strategically, ensuring they pay less in taxes over time and keep more of their wealth working for them.
Why You Should Invest in 2024
With bonus depreciation phasing out over the next few years, now is the perfect time to invest in real estate and capture the available tax benefits. By investing in 2024, you can lock in the 60% bonus depreciation rate for the year, allowing you to avoid large tax bills and grow your wealth more efficiently.
This strategy is especially advantageous for investors with capital gains from other investments, as it allows you to use real estate’s depreciation benefits to reduce your overall tax burden.
Real Estate Professionals Use Bonus Depreciation to Build Wealth
Many seasoned real estate professionals and investors use depreciation deductions to build wealth and grow their portfolios. Here’s how they do it:
Depreciation deductions create paper losses that offset gains from other investments, reducing taxable income.
Bonus depreciation accelerates those deductions, allowing investors to take most of them in the first year.
Unused depreciation losses can be carried forward, providing future tax-saving opportunities .
By understanding and using bonus depreciation, you can reduce your tax liability, increase your returns, and grow your real estate portfolio faster.
Other Tax-Saving Strategies for Real Estate Investors
In addition to bonus depreciation, there are several other tax-saving strategies that real estate investors can use to build and protect their wealth. These include:
1031 Exchanges: A 1031 exchange allows investors to defer capital gains taxes when selling a property by reinvesting the proceeds into a like-kind property .
Tax Credits: Depending on the type of property and the location, there may be available tax credits for things like energy efficiency improvements, affordable housing, or historic property preservation .
Investing through a 401k or IRA: By investing in real estate through tax-advantaged accounts, such as a self-directed 401k or IRA, investors can defer or reduce taxes on gains .
How Fort + Home Capital Can Help
At Fort + Home Capital, we have investment opportunities that can help you take full advantage of bonus depreciation and other tax-saving strategies. If you’re looking to minimize your taxes and keep more of your capital working for you, now is the perfect time to explore real estate as a solution.
Our team is here to guide you through the process and ensure that you’re making the most of available tax incentives. We’d love to help you grow your wealth while reducing your tax burden.
Feel free to reach out to schedule a conversation or learn more about our current investment offerings.
Disclaimer:
This information is for educational purposes only and does not constitute tax, legal, or financial advice. We recommend all investors consult with their tax and legal professionals before making any investment decisions.
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