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.
Do you know what tax credits are, how they work, and how they can affect your portfolio? Tax credits provide incentives to investors to keep doing what they do. It will stimulate the economy and revitalize neighborhoods, both wonderful things for any community. Between deductions and the tax credits, we will discuss below, real estate investors in Chicago will be able to save a bundle on their taxes this coming year. If you don’t know about tax credits and how they work, check out our tips below. Then give your financial planner or CPA a call to learn more about how these tax credits can affect you and your 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
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 Chicago 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!
Property investors in the Chicago area can receive a tax credit depending on what neighborhood they choose to buy their property. When investors put their money into properties in low-income areas, they can see a tax credit of up to 39% of what they put into the property. This tax credit encourages the renewal of run-down neighborhoods and hopes to incentivize the rebuilding of a run-down community. While many people will avoid purchasing in a low-income area, it is also the chance to invest in a highly appreciating, and expanding part of town. Getting such a high tax credit for the purchase can help you to keep your profits from the property in our pocket.
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 classifies people who buy property in order to generate a profit as either an investor or a dealer. Investors buy a property and hold it long-term. When they sell, they will only pay the long-term capital gains rate of 0, 15, or 20%. Dealers are property flippers. People who buy a house at a low price, fix it up, and sell for a much more than they paid, will have their profits taxed as regular income. Before you estimate your taxes in your head, make sure you are classifying yourself in the right way!
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 Chicago 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.