As the end of the year approaches, it’s the ideal time to engage in proactive tax planning to help uncover significant savings while setting the stage for a financially strong year ahead. Year-end planning isn’t just about closing books; it’s about fully exploring every opportunity to save on taxes.
Below, we outline four strategies for maximizing tax savings for real estate investors and professionals during year-end planning.
- Embrace Cost Segregation to Accelerate Depreciation
Cost segregation is one of the most powerful tax-saving tools for real estate investors. This strategy involves identifying components of a property that can be depreciated over shorter time frames, such as five, seven, or 15 years, instead of the standard 27.5 or 39 years.
For example, certain building elements, like flooring, cabinetry, appliances, or land improvements to the property, may qualify for accelerated depreciation. This allows you to significantly reduce taxable income in the early years of owning a property, enhancing cash flow and reinvestment opportunities.
Looking Ahead: Bonus Depreciation and Legislative Updates
As bonus depreciation phases down, staying informed on legislative changes is essential. While efforts to restore 100% bonus depreciation have yet to succeed, ongoing discussions in Congress could impact future tax years. For now, leveraging the 60% rate ensures you’re not leaving money on the table.
Planning Takeaway: Conducting a cost segregation study now ensures you capitalize on the 60% rate. If legislation changes, updates can be made retroactively.
- Accelerate Deductions by Prepaying Expenses
Accelerating deductible expenses before year-end is another effective way to reduce taxable income. Common examples include prepaying property taxes and insurance premiums or scheduling maintenance and repairs on rental properties.
For landlords, expenses such as replacing appliances or investing in energy-efficient upgrades can also qualify for deductions. However, be cautious—only prepay for services or goods you’re certain will deliver value and avoid overextending yourself financially.
- Optimize Capital Gains and Losses
Managing capital gains and losses is a cornerstone of year-end planning for real estate investors. If you’ve sold a property at a profit, consider strategies to offset the gain, such as harvesting losses from underperforming assets or reinvesting in tax-advantaged opportunities like Opportunity Zones.
Additionally, if you missed completing a 1031 exchange earlier in the year, consider offsetting gains through strategies like cost segregation studies or purchasing new rental properties to generate depreciation-based tax benefits.
- Take Advantage of the 179D Energy-Efficiency Deduction
The Section 179D Energy Efficient Commercial Building Tax Deduction allows building owners and designers to claim a deduction of up to $5.65 per square foot for energy-efficient commercial buildings and improvements placed in service in 2024.
In order to be eligible for the maximum deduction of $5.65 per square foot, prevailing wage and apprenticeship (PWA) requirements, which were added to the 179D program starting in 2023 as part of the Inflation Reduction Act, would need to be met. However, if construction began before January 29, 2023, the building would be exempt from the PWA requirements.
Learn more about Section 179D here.
These incentives reduce your tax bill and align with sustainable and community-focused investment strategies.
Partnering for Success
Cost Segregation Authority is ready now to support your firm and your clients. We will gladly provide a no-cost benefit analysis on any property or improvement costs. Please reach out today, and we can start making year-end planning stress-free and impactful!
