How Business Owners & Real Estate Investors Can Use The Tax Code To Their Advantage

Nov 17

If you’re someone who wants to take full advantage of the tax code, you’ll need to fall into one of these two categories:

Business Owner
Real Estate Investor

Being in either of these groups opens up a wide range of tax-saving opportunities. Here are some of the best tax incentives available exclusively for these two types of taxpayers:

Retirement Accounts

People who are self-employed can boost their retirement savings substantially through vehicles like Solo 401(k) plans and SEP IRAs. For 2024, the maximum contribution limit is $69,000, allowing business owners to save thousands in taxes while simultaneously investing towards their future.

There are several other types of retirement plans available, but these are the two most common for self-employed individuals without employees. If you have employees, you may want to consider a SIMPLE IRA. If you want to save even more than the $69,000, consider a Cash Balance Pension Plan or another type of defined benefit plan.

Hiring Your Spouse

I’m not talking about hiring them so you can write off a family vacation.

If your spouse does work in the business, you can hire them strategically to further maximize your retirement contributions. Both of you can potentially maximize your self-employed retirement plan contributions.

With the current limits at $69,000, that could result in $138,000 in total deductions and retirement savings!

Remember, they must actually be doing work in the business and treated as a regular employee.

Hiring Your Kids

Similar to hiring your spouse, business owners can hire their kids and take and take advantage of tax deductions on the wages paid to them.

If your kid earns less than the standard deduction amount ($14,600 in 2024), they won’t need to pay income taxes either. That means the business gets a deduction, and the income is not taxable to your them. It’s a win-win.

Plus, this will give them earned income that they can use to contribute to a Roth IRA, providing even more time for tax free investment growth.

Don’t forget, you need to pay them a reasonable wage and they must be doing actual work for the business. You can’t pay them $500/hour to clean your office or shred some papers.

Mixing Business & Pleasure

Nobody said you can’t run a business and have fun while doing it!

If you’re busy, as most business owners are, it can be hard to find time for a vacation or a night out.

Mixing business and pleasure can give you the best of both worlds and lead to significant tax benefits, as long as you are following the rules and keeping accurate records.

The key to maximizing these benefits is ensuring that your activities are primarily for business purposes, with any personal aspects being incidental. Remember, business expenses are tax deductible but personal expenses are not.

Some of the common expenses that can be enjoyable while still having a primary business purpose include travel, meals, and attending conferences and events.

Home Office Deduction

People who are self-employed can deduct a portion of their home that is used regularly and exclusively for business.

Direct expenses, such as office supplies, furniture, or equipment are fully tax deductible, but you can also deduct indirect expenses.

Indirect expenses are shared expenses for the entire home, such as utilities, rent, insurance, property taxes, mortgage interest, etc. You can deduct a percentage of these costs based on the proportion of your home that is used for business.

Having a home office also provides the benefit of being able to deduct additional travel miles. If you don’t have a home office, every time you travel to another location it’s considered a commute, which is not deductible. Claiming a home office allows you to turn a lot of those commuting miles into deductible travel miles.

Bonus Depreciation & Cost Segregation

Real estate investors can get significant deductions by using cost segregation combined with bonus depreciation. It allows investors to accelerate the depreciation, giving them a greater tax benefit today versus spreading it out more evenly over the full useful life of the asset.

Bonus depreciation is currently 60% in 2024, meaning you can immediately deduct 60% of the cost of qualified property.

Don’t forget about depreciation recapture though! This is a tax real estate investors owe when they sell a rental property. There are ways to minimize it however. If you have capital losses or non-passive losses, that can help to offset the depreciation recapture.

1031 Exchanges

Real estate investors that want to sell their investment property can defer paying taxes by using a 1031 exchange.

This is when you, instead of selling your property and cashing out, reinvest the proceeds into another property. Basically, you’re trading one property for another, which allows you to defer paying taxes until the new property is sold.

This strategy involves strict rules and timelines, however, so it’s essential to work with a qualified intermediary and consult with a tax professional to ensure compliance and maximize the benefits of the exchange.

Short Term Rentals (STRs)

Short term rentals can be a great investment that allows you to use non passive losses to offset your income, especially when combined with bonus depreciation and cost segregation.

Non passive losses can be used to offset other forms of income, such as W2 income from your job. Meaning that if you have significant losses from your short-term rental (created through cost segregation and bonus depreciation), that can be used to offset the income that you earned from your job, which could save you thousands in taxes!

There are some caveats to this strategy however. You need to meet certain requirements, such as self-managing the property and meeting the material participation tests, so it’s recommended you work with a tax professional to ensure it’s being done properly.

Pro Tip: Don’t just buy a short-term rental solely for the tax benefits. Losing money on a bad investment isn’t work saving some taxes.

Real Estate Professional Status (REPS)

This is another strategy that allows real estate investors to treat rental losses as non-passive losses.

There are very specific requirements and nuances to this (even more than the STR strategy), so it’s important to consult with a tax advisor to ensure you're meeting the qualifications and making the most of it.

This strategy is frequently audited by the IRS, so it’s essential to make sure you have detailed records, and everything is done properly. For those who do qualify, it can be a powerful strategy to save on taxes.

Tax Credits

While you’re probably familiar with the child tax credit and education tax credits, business owners and real estate investors also have specialized credits that are available to them. Some of the most common are:

Work Opportunity Tax Credit (WOTC): For employers who hire individuals from specific groups that face barriers to employment, such as veterans, ex-felons, long-term unemployed individuals, and recipients of certain public assistance programs.
Research & Development (R&D) Tax Credit: For businesses that incur expenses related to developing new or improving existing products, processes, or software.
Energy Efficiency & Renewable Energy Credits: For business owners and real estate investors who make energy-efficient upgrades to their properties or invest in renewable energy systems.
Disabled Access Credit: For small businesses that make their facilities accessible to people with disabilities.
Low-Income Housing Tax Credit (LIHTC): For real estate investors who invest in affordable rental housing.
New Markets Tax Credit (NMTC): For businesses or real estate investors who make investments in low-income communities or underdeveloped areas.
Retirement Plan Start-Up Credits: For businesses that establish a qualified retirement plan and meet certain criteria.
Pass-Through Entity (PTE) Tax Credit: A state-level tax credit available in certain states that allows owners of pass-through entities (such as S corporations and partnerships) to pay state income taxes at the entity level rather than at the individual level.

Tax credits are more beneficial than tax deductions because they directly reduce the amount of taxes owed, instead of only reducing your taxable income.

The Bottom Line

By maximizing these strategies, you can effectively reduce your taxable income, increase your deductions, and pay the least amount of taxes as legally possible. Being a business owner or real estate investor expands your options significantly and allows you to use the tax code to your advantage. Remember that tax laws are always changing, so it’s a good idea to consult with a tax professional or accountant to ensure that you're up to date with all the rules and regulations.