6 Tax Deductions Every Real Estate Investor Needs to Know

Posted on Jan 2 2015 - 12:00am by Lance Edwards
Taxes for Real Estate Investors

Real estate investors needn’t fear about losing their hard earned dollars to the IRS with some of these tips from guest author Al Aiello. (Credit: Darren Shaw/SXC)

Looking to keep more of your hard-earned money during tax time this year?

As a real estate investor, entrepreneur and/or business owner, there is nothing more sobering–or painful– than watching as the IRS takes so much of your wealth. Don’t let it happen without a fight!

Our guest author Al Aiello has some great tips, including six real estate and small business deductions you can take to protect you, your family and your cash.

I’ll let Al tell you more…


You need to strategize as follows:

OVERALL: Create additional deductions and avoid taxes on the sale of properties.

SPECIFICALLY:  Deductions offset your other income including profits from sales. The best deductions are:

  • Depreciation Deductions – They do not require the outlay of cash, yet create tax savings from the deduction. Even better is using componentizing or cost segregation where you can double and triple non-cash depreciation deductions. This savings-power of depreciation is why you should be into quality rental/commercial keepers.
  • Retirement Plan Deductions – From IRA’s, SEP’s, Simple plans and the best of all – Defined Benefit Plans. With these plan deductions it is still your money going from one pocket to a better pocket with the earnings in the plan accumulating exponentially tax-free.  With a defined benefit (DB) plan you can deduct life insurance. You can also get tax-free borrowing from the DB plan up to $50,000.  With some retirement plans (including DB plans) you can make deductible contributions up to the latest 1040 extended date of October 15. Even though the contribution is after the tax year, these deductions are for the previous tax year.  What a winner!
  • Personal Expense Deductions – These are expenses you are paying anyway but not deducting or if deducting not maximizing, because of poor recordkeeping, lack of knowledge, bad advice, etc. Examples of such deductions are – auto, business travel, meals, entertainment, home office, family members on payroll, etc.  Over a year they can add up and so do the savings in your pocket.

SPECIFICALLY: Avoiding taxes on the sale of property with the two best ways – a self-directed IRA (SDIRA) and 1031 exchanges.    A SDIRA is ideal for at least some of your profitable wholesale flips of property or paper.  A 1031 tax-free exchange for profitable properties that you hold at least for some period such as a year.  Although with the right planning, you can do 1031’s on flips. Taking back paper (seller financing) is a third way to defer capital gains taxes via Section 453 installment sale reporting. The above tax-free sales’ techniques require dealer-avoidance strategies.

Doing all of the above requires specialized real estate expertise with a reference library and a real estate CPA/tax specialist.

Tax Deduction Strategies for Other Businesses

The most important strategy is reducing garbage self-employment taxes. The conventional strategy for this is an S-corporation, but even much better is a special two-tier LLC-partnership. I use this for my education business and many of my students for their business. It is a big money-saver with very low IRS audit risk.

Other strategies are retirement plan deductions and personal expense deductions.

OVERALL:  All of this with IRS audit proofing such as staying off certain IRS forms, avoiding e-file like the plague, and filing extensions.


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