Tax Saving Strategy for Real Estate Firms

• Reading Time: 7 Minutes
• Published: July 13, 2023
• Last Updated: January 18, 2025

Are you a real estate business owner? Are you tired of paying too much taxes for your properties? If your answer is yes, then keep reading to learn some tax-saving strategies for real estate firms. Any inconsistencies or inaccuracies in the tax amount can cause you to pay fines and penalties regarding your business to IRS. Managing your accounting and bookkeeping accurately and efficiently is essential to determine the correct tax amount. Therefore, you must ensure your real estate accounting process is up to the mark. You can ensure robust real estate accounting by hiring an in-house team or opting for outsourced real estate bookkeeping and accounting services providers. Besides managing the books of accounts, they also help in tax filing and saving tax on your real estate dealings with their expertise and experience. Let us learn about some tax-saving strategies for real estate firms on investment properties.

Types of Real Estate Business

As the name suggests, real estate business is the business of buying, selling, or renting land, buildings, or housing. It is a sector of the economy that deals with constructing and maintaining homes and commercial premises.

Real estate management requires an understanding of the legal aspects involved in owning and operating property, as well as the financial skills necessary to make investment decisions. The most important thing to remember when engaging in the real estate business is always to seek professional advice from qualified experts. There are different types of real estate businesses, and the methods of management and investment vary accordingly. Let us highlight the two most important forms of real estate business.

• The most common form of real estate business is the rental business. In this type of business, the investor/ landlord rents out his property to tenants. The income from rentals is the main source of revenue for this type of business.
• Another common form of real estate business is the sale-leaseback business. In this type of business, the investor/ landlord sells his property to a buyer and then leases it back from him. This type of business is suitable for investors who want to generate income from their properties without managing them directly.

The above-mentioned types of properties are investment properties, i.e., acquired for the sole purpose of investing and earning profits from them. Choosing the right type of real estate business and corresponding management, accounting for real estate, and investment strategies are crucial for success in this field.

Now there are two terms that are usually a bit confusing regarding real estate business, i.e., landlord and property owner. Understanding the difference between the two is important to properly understand real estate accounting basics, rules, and regulations. So, let us learn the difference between both.

What Is the Difference Between a Landlord and a Property Owner in the USA?

A landlord is someone who owns rental property. A landlord may own multiple properties or just one. On the other hand, property owners own real estate but do not necessarily rent it out to tenants. In the United States, there are many laws and regulations that govern the relationship between landlords and tenants, as well as property owners. These laws vary from state to state, so being familiar with the rules in your specific jurisdiction is important.

In general, landlords are responsible for maintaining the property and ensuring it is safe and habitable for tenants. They are also responsible for collecting rent and enforcing the lease agreement terms. Property owners, on the other hand, may or may not be involved in the day-to-day management of their property. Some property owners hire a professional management company to handle these tasks, while others take on these responsibilities themselves.

It is important to note that, in some cases, an individual can be both a landlord and a property owner. For example, if you own a duplex and live in one unit while renting out the other, you would be considered both a landlord and a property owner.

How To Save Tax on Real Estate Investment Properties?

Whether you are a landlord or property owner, if you have invested in real estate, you will have to pay taxes as per the relevant laws and regulations. Sometimes, the taxes may be too high, or you might even be paying double taxes. However, some simple strategies can help save tax on investment properties. Let us have a detailed look at these strategies.

• Depreciate over time: This tax-saving strategy allows you to spread the cost of your assets over their useful life, saving you money in the long run. To take advantage of this strategy, you must keep track of the original cost of your assets and their depreciation schedule when managing your accounting and bookkeeping. You can then claim a deduction for the depreciation expense on your tax return. It can be a complex process, so working with a qualified accountant or tax advisor is important to ensure you take full advantage of this strategy.
• Use a pass-through deduction: There are two types of firms in the real estate industry: those that own the property and those that provide services. The first type of firm can use a pass-through deduction to save on taxes. This type of firm is typically an LLC or S-corporation. The second type of firm, which provides services, is not eligible for the pass-through deduction and must pay taxes on its income at the corporate tax rate.
  The pass-through deduction allows firms to deduct up to 20% of their Qualified Business Income (QBI). Firms must file Form 1040 and attach Schedule C or E to take advantage of the pass-through deduction. On Schedule C, businesses report their business income and expenses. On Schedule E, businesses report their rental income and expenses.
  The pass-through deduction can be a lucrative tax-saving strategy for real estate firms. When used correctly, it can minimize a firm’s tax liability and maximize its profitability.
• Take advantage of capital gains: If you are a real estate firm, you may be able to take advantage of capital gains tax rates. Capital gains tax rates are lower than ordinary income tax rates, so you may be able to save on your taxes by selling assets for a profit. To take advantage of capital gains tax rates, you must hold onto your assets for at least a year before selling. Long-term capital gains are taxed lower than short-term ones, so it is worth waiting if you can. Investing in real estate investment trusts (REITs) may also save on taxes. REITs are taxed differently than other investments and may offer some tax advantages. Taking care of all this is a part of real estate accounting, so talk to your accountant or financial advisor to see if capital gains tax rates could help you save on your taxes.
• Make an installment sale: An installment sale is a type of financing in which the buyer makes payments to the seller over time rather than all at once. It can be a good option for real estate firms looking to save on taxes, as the gain from the sale can be spread out over several years. To make an installment sale, the firm must itemize its expenses and keep track of the buyer’s payments.
• Use incentive programs to defer taxes: Real estate firms can take advantage of the government’s incentive programs. These programs allow businesses to postpone paying taxes on their income or capital gains. Businesses can take advantage of many different incentive programs to defer taxes.
  One tax deferral program that businesses can use is the Energy Efficiency Tax Credit. This credit allows businesses to postpone paying taxes on energy-efficient improvements that they make to their property. It can be a great way for real estate firms to save money on their energy bills and help them reduce their carbon footprint.
  A 1031 exchange is another incentive program that allows you to defer taxes on the sale of your investment property by reinvesting the proceeds from the sale into a new property. It can be a valuable tool for investors looking to increase their portfolio without incurring a large tax bill.

Conclusion

With the right tax-saving strategy for real estate firms, businesses can have more cash available for their investments. The strategies outlined in this blog provide a great starting point for any company looking to maximize its savings and increase profitability with effective accounting and bookkeeping. With smart planning, all business owners – no matter what kind of real estate business they own – can ensure minimal taxes are paid on their income every year.

Though following these strategies can help you save a significant amount on taxes, you need an expert accountant to ensure you use all the benefits and deductions as and where applicable. You can hire an in-house accountant or use expert accounting and bookkeeping services providers. Based on your business requirements, you can either hire specialized real estate bookkeeping services, payroll services, or an overall accounting and bookkeeping services provider. So, you can contact us if you are looking for an outsourced accounting and bookkeeping services provider. At Whiz Consulting, we help businesses from different industries, including real estate, efficiently manage their finances and save as much costs as possible with the help of our expert professionals.

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