For real estate investors, tax credits can play a huge role in your overall financial picture. While many people know about tax deductions, not everyone fully understands how tax credits work! Learn more about them and how to put them to work for you in our latest post.
Tax credits are incentives provided to investors to encourage certain behaviors or investments. They function by reducing the amount of tax owed by the investor, effectively lowering their tax burden. This can have a significant impact on an investor’s portfolio by increasing overall returns.
In the context of real estate investing, tax credits can play a vital role in stimulating economic activity and revitalizing neighborhoods. By leveraging tax credits, investors can potentially save a substantial amount on their taxes while contributing to community development.
Combining deductions with tax credits can lead to significant tax savings for real estate investors in Fort Myers. It’s essential for investors to familiarize themselves with available tax credits and understand how they can benefit from them. Seeking guidance from a financial planner or CPA can provide valuable insights into maximizing the benefits of these tax incentives for both the investor and their business.
What Are Tax Credits?
Tax credits are issued by the IRS to help investors offset some of the costs they would otherwise face when it’s time to pay their taxes. There are all kinds of tax credits available. Some of our favorites are listed below, with many more not mentioned here. Before making any financial moves, consult with your CPA to better understand how the use of tax credits can benefit you!
Types Of Credits
Renovations
Many renovations made to the home will allow for a tax credit. Properties purchased that were built prior to 1936 will receive a 10% tax credit to help the buyer offset renovation costs. Green energy offers many tax credits as well. As a Fort Myers investor, you can receive the Residential Energy Tax Credit for things like solar energy, energy efficient appliances, and small wind energy devices. Going green not only helps the environment, but it can lower your bills and tax liability as well!
Community Renovation
Property investors in the Fort Myers area may qualify for a tax credit based on the neighborhood where they purchase properties. Investing in properties located in low-income areas can result in a tax credit of up to 39% of the investment amount. This tax credit serves as an incentive to revitalize neglected neighborhoods and promote community redevelopment.
Despite the tendency for some to avoid purchasing in low-income areas, investing in these neighborhoods presents an opportunity to participate in a rapidly appreciating and expanding part of town. By taking advantage of the substantial tax credit available for such purchases, investors can retain a larger portion of their profits from the property.
Refundable vs. Non-Refundable
There are two types of tax credits offered by the IRS. Some are considered refundable while others are considered non-refundable. A refundable credit will cut you a check if the amount of the credit is more than what you owe in taxes. On the other hand, a non-refundable credit will be applied to what you owe in taxes. If the credit is larger than what is owed in taxes, you will not receive any money for the remaining balance of the credit. Make sure you know which kind of credit you will receive after submitting your information to the IRS.
Dealer vs. Investor
The IRS distinguishes between individuals who purchase property for profit as either investors or dealers. Investors acquire properties with the intention of holding them for the long term. Upon selling, they are subject to the long-term capital gains tax rate, which can range from 0% to 20%.
On the other hand, dealers are often referred to as property flippers. They purchase houses at low prices, renovate or improve them, and sell them for a significantly higher amount. Profits generated by dealers are taxed as regular income.
It’s crucial to classify yourself correctly to ensure accurate tax estimation. Therefore, before making any assumptions about your tax obligations, ensure that you are categorizing yourself appropriately as either an investor or a dealer.
Deductions
There are all kinds of deductions to be found as a real estate investor. However, with changes to the tax laws, these deductions are handled a bit differently. First off, you’ll be able to deduct your mortgage interest on a loan of up to $750k. You will be able to deduct property taxes levied in your name, of up to $10k. This 10k includes your state and local taxes as well.
As a Fort Myers real estate investor, tax credits can be tricky business. To fully understand them and how they work, consult a CPA who specializes in working with real estate investors. They will help you find and maximize the deductions and tax credits available to you. Not knowing what’s available to you can cost you a fortune over the long-term. Don’t leave money on the table! Educate yourself about the ever-changing tax code and how the rules will affect you and your business.