Facing tax exposure as a real estate investor in California can feel overwhelming. High property values and stringent regulations can significantly impact returns.
At Slater Cosme, PC, we understand the stress that comes with managing these investments. Located in Pasadena, California, our firm assists clients throughout Los Angeles County in optimizing their real estate investments with practical tax strategies. Contact us today to explore how we can help reduce your tax liabilities.
Leverage 1031 Exchanges to Defer Capital Gains Taxes
One of the most effective tools for real estate investors is the 1031 exchange. This strategy allows us to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds into another "like-kind" property.
The key points of a 1031 exchange are as follows:
Identify a new property within 45 days of the sale.
Purchase the replacement property within 180 days.
The value of the new property must be equal to or greater than the one sold to defer capital gains taxes fully.
Proper documentation and timing are essential, especially with multiple or mixed-use properties. This complements strategies such as depreciation and financial planning.
Short-term and long-term capital gains are taxed differently, and timing property sales can affect overall tax liability. Properties held for over a year generally qualify for lower long-term rates, while properties sold sooner are taxed at higher short-term rates.
Plan for Short-Term vs. Long-Term Capital Gains
Short-term and long-term capital gains are taxed differently, and timing property sales can affect overall tax liability. Properties held for over a year generally qualify for lower long-term rates, while properties sold sooner are taxed at higher short-term rates.
By carefully planning when to sell, reinvest, or combine assets using strategies like 1031 exchanges, you can minimize your tax burden. We help clients evaluate holding periods and structure transactions strategically, enabling real estate investments to grow while minimizing tax exposure.
Maximize Depreciation Deductions
Depreciation enables us to deduct the cost of our investment properties over time, thereby reducing taxable income. In California, residential rental properties can be depreciated over 27.5 years, while commercial properties are depreciated over 39 years.
Benefits of maximizing depreciation include:
Reduces taxable income, lowering tax bills.
Improves cash flow by deferring tax payments.
Enhances ROI by increasing property value through reinvestment.
Accelerated depreciation methods and cost segregation studies can boost early-year deductions. Proper tracking and documentation guarantee compliance with IRS regulations.
Use Qualified Business Income Deduction for Rental Properties
The Qualified Business Income (QBI) deduction can allow real estate investors to deduct up to 20% of qualified income from rental properties. Not all rental arrangements qualify, so it’s essential to structure property management and ownership carefully.
We review clients’ rental income, expenses, and entity structure to determine eligibility and maximize potential deductions. For investors, combining QBI planning with depreciation and other tax strategies creates a cohesive approach to minimizing overall tax exposure while enhancing investment returns.
Utilize the Pass-Through Entity Tax (PTET) Election
California's Pass-Through Entity Tax (PTET) election allows S-Corporations, partnerships, and LLCs to pay state income taxes at the entity level, providing a workaround for the federal $10,000 SALT deduction cap.
Advantages of PTET election include:
Reduces federal taxable income by deducting state taxes.
Provides relief for high-income earners limited by the SALT cap.
Offers flexibility in tax planning for real estate investments.
We help clients structure entities and elections to maximize benefits while remaining compliant with California law.
How Financing Choices Affect Tax Exposure
Financing choices can significantly impact the tax outcomes of real estate investors. Mortgage interest is typically deductible, which helps reduce taxable income. Using leverage wisely can boost investment returns while providing deductions on interest payments.
We help clients apply interest deductions effectively, time new loans with property improvements, and consider refinancing strategies that may generate tax benefits or allow deferral.
Implement Cost Segregation Studies
Cost segregation studies involve separating personal property components from real property to accelerate depreciation deductions. This strategy enables us to depreciate certain components over a shorter period, resulting in increased deductions in the early years of ownership.
Key benefits of cost segregation include:
Accelerates depreciation, increasing early-year deductions.
Improves cash flow by deferring tax payments.
Enhances ROI by increasing property value through reinvestment.
Conducting cost segregation studies optimizes tax strategy and improves investment returns.
Benefit of Opportunity Zone Investments
Opportunity Zones offer investors the opportunity to defer or reduce capital gains taxes when investing in designated areas. Real estate investments in these zones can offer temporary deferral of gains and a potential step-up in basis after holding periods.
Be aware of the following points for Opportunity Zone investing:
Tax deferral: Delay capital gains taxes by reinvesting in a qualified zone.
Partial exclusion: Hold for five or seven years to reduce taxable gains.
Full exclusion: After 10 years, new gains from investments may be tax-free.
We help clients understand their eligibility, timelines, and how to integrate their plans into broader real estate planning.
Take Advantage of Proposition 13
Proposition 13 limits the annual increase in property tax assessments to 2% per year, which provides predictability in expenses. However, reassessment can occur when property ownership is transferred.
We help clients structure ownership to minimize reassessment risks. Using irrevocable trusts, family limited partnerships, or joint tenancy arrangements can preserve Proposition 13 benefits while maintaining control over property. Careful planning reduces property tax exposure and maintains long-term predictability for real estate investments.
Explore Mills Act Contracts for Historic Properties
The Mills Act provides property tax reductions for owners of qualified historic properties who agree to maintain them in accordance with specific standards. The Mills Act helps preserve landmark buildings while offering financial incentives.
Benefits of Mills Act contracts include:
Provides significant property tax reductions.
Offers incentives for property rehabilitation.
Preserves historic properties for future generations.
Engaging in a Mills Act contract can be a strategic choice for investors who own or are considering historic properties.
Recordkeeping and Documentation Best Practices
Accurate recordkeeping is essential for reducing tax exposure and substantiating deductions. Thorough documentation streamlines audits and guarantees compliance with state and federal laws.
Best practices include:
Maintain receipts for improvements, repairs, and expenses.
Track depreciation schedules and cost segregation studies.
Organize loan agreements, contracts, and property correspondence.
Consult With an Experienced Real Estate Attorney
Working through California's real estate tax laws can be challenging. Consulting with an experienced real estate attorney helps investors stay compliant while identifying strategies to reduce tax exposure.
We offer guidance on structuring investments, implementing strategies like 1031 exchanges and depreciation, and reducing tax liabilities. Our goal is to make sure your investment decisions align with both financial and legal requirements, providing you with confidence and peace of mind.
Let's Optimize Your Real Estate Investments Together
Minimizing tax exposure is critical for maximizing returns on real estate investments in California. Implementing specific strategies can reduce liabilities. At Slater Cosme PC, we support real estate investors in Los Angeles County, California, with practical guidance and strategic planning.
If you're looking to optimize your real estate investments and reduce tax exposure, contact our office in Pasadena, California, to discuss how we can assist you.
