4 End of Year Tax Deductions Every Real Estate Investor Needs to Know

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Mastering the complexities of tax laws and their impact on investments can be daunting. In this article, we aim to simplify the topic by focusing on the tax advantages of vehicle depreciation and investment in real estate. We’ll explore key deductions such as bonus depreciation for luxury vehicles and tax credits for electric vehicles. Additionally, we’ll discuss the benefits of qualifying as a real estate professional and provide an overview of upcoming changes in tax laws. Whether you’re a seasoned investor or just starting out, this guide offers valuable insights to optimize your financial planning.

Prepay expenses using the IRS Safe Habor

Under the IRS Safe Harbor rules, real estate investors can prepay certain expenses to potentially benefit from tax advantages. Here’s a list of common expenses that can be prepaid in accordance with the Safe Harbor rules:

  1. Property Taxes: Real estate investors can prepay property taxes up to 12 months in advance and still qualify for deductions.
  2. Mortgage Interest: Prepaying mortgage interest is generally allowed, as long as it relates to a period of no more than 12 months.
  3. Insurance Premiums: Insurance premiums related to the property, such as hazard insurance, can often be prepaid within the Safe Harbor timeframe.
  4. Utility Bills: Payments for utilities like water, electricity, and gas may be eligible for prepayment within the Safe Harbor limits.
  5. Maintenance Contracts: Service contracts for ongoing maintenance and repairs can sometimes be prepaid, provided the services cover no more than 12 months.
  6. Professional Fees: Fees for professional services related to the property, such as legal or accounting services, may be eligible for prepayment within the Safe Harbor guidelines.
  7. Lease Payments: If you’re leasing the property, you may be able to prepay lease payments within the Safe Harbor timeframes.
  8. Association Dues: Prepaying homeowner association dues or condominium fees can be considered under the Safe Harbor rules.

For example if you pay $3,000 a month in rent and you would like a $36,000 deducation this year you can mail a rent check for $36,000 to cover all of your 2024 rent:

  • You deduct $36,000 this year (2023 – since you paid it in 2023)
  • The landlord reports $36,000 as rental income in 2024 (the year he received the money)

Don’t surprise your landlord and make sure they understand the strategy you are trying to use.

Vehicle Purchase and Place it in Business service on or before December 31st 2023

Real estate investors eager to harness tax benefits through vehicle acquisition should take decisive action long before December 31st, 2023.

To maximize deductions, it’s crucial to acquire and put the vehicle into business service before the year’s end. Meeting this deadline and driving at least one business mile on or before December 31st may qualify investors for Section 179 expensing. This enables them to deduct the vehicle’s cost as an expense in the same year, subject to specified limits.

Furthermore, the implementation of bonus depreciation provisions can significantly enhance the ability to write off a substantial portion of the vehicle’s cost in the very first year. It is imperative to meticulously document business usage to fully leverage these tax advantages.

Take advantage of the Tax Cuts and Jobs Act (TCJA) to unlock the potential for an 80% bonus depreciation on Heavy New or Used SUVs, Crossover Vehicles, Vans, and Pickups. Plus, seize the opportunity to enjoy up to $20,200 in discounts for eligible electric vehicles.

Heavy New or Used SUV, Crossover Vehicle, or Van

Suppose you or your S corporation purchases and places in service a new or used SUV or crossover vehicle classified as a truck by the manufacturer, with a gross vehicle weight rating (GVWR) of 6,001 pounds or more, on or before December 31, 2023. This strategic move can provide you with significant benefits, and here’s why:

With this newly acquired vehicle, you gain the power to:

  • elect bonus depreciation of 80 percent thanks to the TCJA;
  • elect Section 179 expensing of up to $28,900;
  • elect MACRS depreciation using the five-year table; and
  • avoid the luxury limits that cap vehicle depreciation deductions.

Bonus depreciation is a powerful tax benefit that applies to both new and used vehicles, as well as other types of property. This valuable provision, made possible by the TCJA, offers significant advantages for businesses.

To maximize your deduction on the heavy SUV, follow the order described below for optimal results.

  1. Claim Section 179 expensing.
  2. Claim bonus depreciation. (Note: This is automatic unless you elect out.)
  3. Claim MACRS depreciation.

Example:

You buy a $100,000 in a heavy classified SUV, and use it 90 percent for business use. Your write-off will look like this:

  • $28,900 in Section 179 expensing
  • $48,880 in bonus depreciation
  • $2,440 in 20 percent MACRS depreciation, or $611 if the mid-quarter convention applies because you placed more than 40 percent of your MACRS assets in service in the final quarter of the year.

So the 2023 write-off on this $90,000 (90 percent business use) SUV can be as high as $80,220 ($28,900 +$48,880 + $2,440).

If you wish to forgo the 80 percent bonus depreciation in 2023, you have the option to elect out of it.

New or Used Pickup

By purchasing and placing a qualifying pickup truck (new or used) into service on or before December 31, 2023, you unlock four significant advantages with this newly acquired vehicle:

  • Bonus depreciation of up to 80 percent
  • Section 179 expensing of up to $1,160,000
  • MACRS depreciation using the five-year table
  • No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have:

  • a GVWR of more than 6,000 pounds, and
  • a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.

Example:

You pay $55,000 for a qualifying pickup truck that you use 91 percent for business. You use Section 179 to write off your entire business cost of $50,050 ($55,000 x 91 percent).

Short bed Truck Qualifications

If the pickup truck successfully passes the more-than-6,000-pound-GVWR test but unfortunately fails the bed-length test, according to the tax code, it is classified as an SUV. However, this classification is not necessarily a bad thing. In fact, the vehicle remains eligible for expensing of up to the $28,900 SUV expensing limit and 80 percent bonus depreciation. This presents a great opportunity for individuals looking to maximize their tax benefits while still enjoying the benefits of a powerful pickup truck.

New or Used Qualifying Cargo or Passenger Van

A new or used cargo or passenger van weighing over 6,000 pounds, if purchased and put into service by December 31, 2023, can qualify for four significant tax benefits.

  1. No luxury limits on vehicle
  2. Bonus depreciation of 80 percent
  3. Section 179 expensing of up to $1,160,000
  4. MACRS depreciation using the five-year table

Key point:

Section 179 offers the opportunity to fully deduct the business expenses of qualifying cargo and passenger vans.

How does a Cargo Van Qualify?

To be eligible for either 80 percent bonus depreciation or up to $1,160,000 in Section 179 expensing, the cargo van must meet the following requirements:

  • a GVWR of more than 6,000 pounds,
  • a fully enclosed driver compartment separate from the load-carrying area,
  • no seating behind the driver’s seat, and
  • no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van successfully passes the GVWR test but does not meet the requirements of any of the other qualifying tests mentioned earlier, it is legally classified as an SUV instead.

How does a Passenger Van Qualify?

If the van has a GVWR exceeding 6,000 pounds and accommodates more than nine individuals behind the driver’s seat, according to tax law, it is categorized as a passenger van rather than an SUV. This classification makes it eligible for Section 179 expensing of up to $1,160,000 and 80% bonus depreciation. Take advantage of these tax benefits to maximize your savings and optimize your business investments.

How does a Minivan Qualify?

A number of vans that were traditionally considered minivans now have GVWRs exceeding 6,000 pounds, making them eligible for the Section 179 deduction and 80 percent bonus depreciation, as illustrated in Example 2 mentioned earlier. This presents a compelling opportunity for those seeking to optimize tax benefits while retaining the practicality and versatility of these vehicles.

Buy a Depreciation-Limited New or Used Car

If you or your corporation purchase and put into service a new or used passenger vehicle, like a car (or a pickup truck, SUV, or van with a GVWR of 6,000 pounds or less), by December 31, 2023, you or your corporation can potentially claim up to $8,000 in bonus depreciation.

The TCJA has significantly raised the depreciation limits for luxury passenger vehicles, taking into account inflation. These updated limits, effective from 2023, demonstrate a substantial boost in benefits for taxpayers in this category.:

  • $12,200 for the first taxable year,
  • $19,500 for the second taxable year,
  • $11,700 for the third taxable year, and
  • $6,960 for each succeeding year.

The limits mentioned earlier are for the entire year. Opting for bonus depreciation allows you to claim a maximum first-year deduction of $20,200 on a vehicle subject to depreciation limitations. This approach provides a confident and advantageous strategy for maximizing your deductions.

The ceilings mentioned above do not apply if you spend $69,000 or less and utilize bonus depreciation ($61,000 without bonus depreciation). Rest assured, this strategy allows you to maximize your benefits while maintaining compliance with the regulations.

Electric Vehicles

By opting for an all-electric vehicle or a plug-in hybrid electric vehicle, you could potentially be eligible for a tax credit of up to $7,500. Take advantage of this opportunity to enjoy both eco-friendly transportation and potential savings.

The recently implemented Inflation Reduction Act has completely overhauled the credit system, starting from August 17, 2022. Furthermore, there will be additional modifications in 2023, with further changes expected in 2024.

Please note that there are income thresholds for the $7,500 new vehicle credit. For married couples filing a joint tax return, the limit is $300,000. For heads of household, the limit is $225,000. And for single tax filers, the limit is $150,000.

Avoid these issues with Vehicle Tax Deductions

Mid-quarter trouble

Additionally, there is the potential for encountering the mid-quarter convention. This convention limits the MACRS depreciation to only 5 percent if the vehicle is put into service during the last quarter of the year. The mid-quarter convention is triggered when you put more than 40 percent of your MACRS assets (excluding real property) into service in the last three months of the year. This convention ensures proper accounting and depreciation for assets acquired during that period.

Section 179 trouble

The Section 179 expensing provision does not allow for the deduction to surpass the depreciation limit when it comes to luxury vehicles. Consequently, Section 179 deductions hold no value for vehicles falling under the luxury depreciation-limited category.

 

Find out if you could qualify as a real estate professional.

To be recognized as a real estate professional, it is imperative for a taxpayer to successfully meet the following essential tests:

  1. Perform more than 50% of services in real property trades or businesses (“50% test”), and
  2. Perform more than 750 hours of service in real property trades or businesses (“750 hours test”), and
  3. Materially participate in each rental activity (“material participation test”).

A real property trade or business encompasses a wide range of activities such as real estate development, re-development, construction, reconstruction, acquisition, rental, operation, management, leasing, or brokerage. It is a dynamic industry that offers numerous opportunities for growth and success.

In addition, the real estate industry offers a range of tax advantages that can significantly benefit taxpayers. By meeting the qualifications for a real estate professional, you could potentially claim unlimited losses on your tax returns and save thousands of dollars in taxes each year.

 

Take advantage of bonus depreciation on purchases of qualified real property.

If you want to qualify for the full benefits of the Tax Cuts and Jobs Act, time is running out. The provision that allows for 100% bonus depreciation on a wide variety of assets that are considered “qualified property” for assets placed in service on Sept 27, 2017 and before January 1, 2023.  Bonus depreciation will decrease by 20 points each year over the next few years until it eventually phases out completely.

This TCJA extended the bonus depreciation rule was set to expire at the end of 2019 and increased the deductible amount to 100% for assets placed in service after Sept. 27, 2017 and before Jan. 1, 2023. Unless the legislation is adjusted, the bonus percentage will decline by 20 points each year for the following several years until it fades away.

 

In conclusion, making informed decisions about vehicle purchases and real estate investments can yield significant tax advantages. Whether it’s capitalizing on the bonus depreciation for luxury vehicles, tax credits for electric vehicles, or realizing the benefits of being a recognized real estate professional, there are numerous opportunities to maximize your savings. However, it’s crucial to stay updated with ever-evolving tax laws and regulations. Ultimately, adeptly navigating these opportunities can lead to enhanced financial health and success.

When you are ready to equip yourself with the knowledge to optimize your investments, sign up for our upcoming webinar on “Tax Strategies for Real Estate Investors” Do not miss this opportunity to learn from Jose A. Ramirez the Chief Tax Strategist and elevate your real estate investing game.

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Jose A. Ramirez

Jose A. Ramirez is a corporate accountant turned entrepreneur who has dedicated his life to helping businesses develop CASH SAVING SYSTEMS.
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