These Real Estate Investment Strategies Can Increase Cash Flow and Provide Huge Savings

Many strategies can help real estate investors create more cash flow to increase their wealth. These techniques are not only for people who want to expand an existing portfolio but also perfect for first-time investors or entrepreneurs who want to market freedom, security, and lifestyle by investing in real estate.

1. Cost Segregation Study

A cost segregation study is an in-depth analysis of the building components considered personal property, also known as capital assets. The value of these assets can be depreciated over a shorter recovery period for tax purposes.

Usually, it’s many years less than what would otherwise apply if the asset was classified as real property instead of personal property. In most cases, cost segregation services can help defer state and federal income taxes. It also increases cash flow by allowing you to claim big tax deductions for depreciation.

2. 1031 Exchange

One of the biggest expenses for real estate investors is capital gains tax levied on the profit of an asset sale held by the previous owner for at least a year. The percentage can vary widely, but it can be as much as 20 percent.

Unfortunately, sellers and buyers cannot avoid paying capital gains tax. However, they can delay or defer it until such time that it doesn’t hurt their pockets anymore. One strategy is the 1031 exchange.

A 1031 exchange is a swap of one property for another. It allows you to roll all the capital gains and many expenses and closing costs into the replacement property. The key is to identify and close on a like-kind replacement real estate investment within 180 days.

But what is “like-kind”? Many real estate investors are confused with the term since it is ambiguous. First, it can be properties that belong to the same broad category. In other words, they are used for trade or business. One may swap an apartment complex for a warehouse. Second, the value of the new property should be equal to or greater than the exchanged asset.

3. Rehabilitation Tax Credit

tax credit

The gentrification of many neighborhoods across the United States now provides real estate investors access to historic buildings that they could transform into income-generating assets. These can include hotels, apartments and condominium units, office buildings, and shopping centers.

However, if these properties lack proper maintenance, repairing them can be expensive, costing businesses millions. To save money, entrepreneurs can consider claiming a rehabilitation tax credit.

Under the rules, qualifying taxpayers can claim 20 percent tax credit pro-rated for over five years. The credit no longer applies to buildings built before 1936. However, new owners can claim a 10 percent tax credit (based on the old law) as long as they purchased or leased the property on January 1, 2018, and have continued to do so since then.

4. Brownfields Redevelopment and New Markets Tax Credits

What is brownfields development? Basically, it’s the redevelopment of abandoned and contaminated properties in “brownfields” areas. It is undertaken by entrepreneurs who can gain tax incentives when they invest in such projects.

The program has been around for years, and its benefits have encouraged many real estate investors to consider buying such properties at severely reduced rates.

Further, many have found that the cost of redeveloping brownfields is much less than what they would otherwise pay in similar upwardly-priced areas. They can deduct the full cost of rehabilitating the area toward their taxes on the year they are incurred instead of being spread over many years.

Meanwhile, the new markets tax credit (NMTC) is a federal program designed to spur the development of businesses in low-income areas where poverty rates are high. These may include Native American reservations, rural and inner-city locations, and military bases. It gives investors more tax credits when they invest in these regions. Maximizing NMTC has become so popular with real estate investors that they can even get up to 39 percent in tax credits when they invest.

5. Real Estate Investment Trusts (REITs)

REITs are companies that pool the funds and assets of many investors and invest them in real estate projects. They operate like mutual funds but with one key difference: they must pay over 90 percent of their net income as dividends to shareholders.

Since they pay out so much, most investors who focus on passive portfolio management prefer REITs to direct investments in properties. Real estate investors can even use them as income substitutes when they suffer losses due to economic recessions, making it hard for them to earn enough rental income from their real estate assets.

These are just some tax incentives and strategies real estate investors can take advantage of. Overall, someone who likes to earn money from these assets should consider how these benefits will help the business increase profitability by maximizing returns and reducing tax liabilities.

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