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Smart Tax Investments to Consider Now

Investing doesn’t have to be rocket science. The basic idea, is to put your money to work so it grows into a lot more. Of course, in practice, investing is much more complicated, and the tax bill can be daunting if you don’t make good choices or plan ahead.

One of the best ways to invest and build wealth is to pay yourself first.

Everyone’s financial situation and risk tolerance is unique, so talk to a tax specialist for specific investment questions.

Smart investors know that some opportunities make money and grow tax free — or at least reduce what you owe during tax season. Here are eight smart tax investments to make right now.

1. Maximize Your Contributions

One of the best ways to invest and build wealth is to pay yourself first.

Retirement accounts, such as a traditional IRA or 401(k), offer tax-deferred opportunities for growth. In 2022, people under the age of 50 can contribute a maximum of $6,000 to a traditional IRA and $20,500 to a 401(k). This reduces your taxable income now — and puts your money to work for retirement in the future.

2. Make Tax-Efficient Investments

Tax-efficient investments are tax free or are actively managed to reduce what’s owed, or include spreading the payments over time. These types of investment include:

  • Municipal bonds
  • Tax-managed mutual funds
  • Index funds that are actively managed

3. Hold Investments in the Proper Accounts

If you have investments that create income, keeping them in a regular account can increase your tax bill. It’s better to move them to a tax-deferred account, such as a traditional IRA.

The reverse is true for investments that don’t create much income. This type of investment — mutual funds and municipal bonds, for example — should be kept in an account that doesn’t defer tax for easy access when you need it.

4. Invest and Hold

One of the biggest destroyers of wealth at tax time is capital gains tax — a tax on the gains you realized from the sale of an asset. Capital gains taxes are based on income, and they’re taxed at your regular tax rate. For some high-income taxpayers, that’s close to 40%. To avoid this tax, hold on to stock investments and real estate until they qualify for long-term capital gains rates with a maximum threshold of 20%.

5. Utilize a 1031 Exchange

If you have a supply of cash from the sale of a property, protect yourself from capital gains tax by using a 1031 exchange. This rolls the profits of the sale directly into another piece of real estate, allowing you to legally defer paying the tax man.

Buying a home is expensive and a big investment. You could save even more money by working with a real estate agent who offers home buyer rebates.

6. Consider Separately Managed Accounts (SMAs)

SMAs are portfolios of individual investments that are managed by an investment company. This allows investors to track the performance of individual funds but does not require them to spend hours making changes or learning how to invest in stocks.

This strategy also allows investors to participate in what’s known as “tax-loss harvesting.” When individual investments lose money, your broker can sell them to offset capital gains taxes you may owe on the sale of investments for a profit.

7. Invest in Real Estate

Spending money on real estate can actually provide you with tax breaks. Potential tax write-offs for rental properties include:

  • Repairs
  • Property taxes
  • Operating expenses
  • Depreciation

Passive income investors don’t have to pay Social Security or Medicare taxes on income either.

8. Refinance Your House

If you itemize your taxes, refinancing your house is a smart investment. It starts with a comparative market analysis, which provides a general idea of your home’s value based on the sale price of similar homes in your area. It can help you decide whether to refinance for home improvements or just to lower your interest rate.

Bonus Tips for Real Estate Investors

Real estate investments require specific strategies to maximize your tax benefits. These include:

  • Keeping paperwork organized to avoid potential surprises during tax season
  • Holding investment properties for at least one year to avoid capital gains tax
  • Preparing to be treated like a business if more than half your income is generated from real estate investments
  • Taking a depreciation deduction on real estate investments

Inexperienced real estate investors may want to hire a certified public account as their portfolio grows. A skilled CPA can help you save money by finding every eligible tax deduction and suggesting tax-saving investment strategies for future investments.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.

4 Reasons to Keep an Investment Journal

Whether you’ve already built an investment portfolio or are just getting started, it’s important to understand your investment goals and track your progress along the way. Keeping an investment journal is a simple and effective way to monitor your journey.

An investment journal is more than a log tracking your net worth. It can give you insight into who you are as an investor and what you hope to accomplish with your portfolio. Here are four reasons to keep an investment journal and how you can make it work for you:

1. Track Progress Over Time

At its core, an investment journal is a place for you to track your investments and how they perform. You can do this on a computer or in a notebook. Just make sure you keep your journal in a safe place that you can access easily. Log specific information in your journal, such as:

  • The date you invested
  • How much you invested
  • What you invested in — rental property, stock shares, etc.
  • What you expect to get out of the investment
  • Risks that might be involved

Regularly update gains or losses, as well as any information that may explain changes. You should also track expenses related to your residential real estate investments so you can deduct them when filing taxes. Tracking this data over time will help you monitor your wealth and make future decisions.

2. Set Financial Goals

Making money and building wealth are the overall goals of investing, but it’s important to set specific short- and long-term goals. Your short-term goals might be to earn extra money for your savings account, while your long-term goals might be to live off the dividends of your investments. You can use these goals as benchmarks to track your overall progress and make adjustments accordingly.

Set your goals for a specific time period, such as quarterly, biannually, or annually. At the end of each period, look at your investments to see how they’re performing. If an investment exceeds your expectations, you may want to increase how much you’ve invested to grow your wealth more quickly. If your investment is underperforming, it might be time to sell and invest the profits elsewhere.

If you’ve invested in real estate, you can take advantage of a 1031 Exchange, which allows you to defer paying capital gains tax by reinvesting the profit into the purchase of a like-kind property. Research the best 1031 Exchange companies, including by state as applicable, to help you maximize the earnings on your investment.

3. Log Lessons Learned

Your investment journal is a place where you can keep research you gather over time as you make investments. For example, real estate investors who buy and flip homes have more than one option for selling property. They can hire a real estate agent, sell to a company that buys houses for cash, or sell the property themselves to avoid paying a three-percent real estate commission.

Research what each choice entails and make notes of what you learn. You’ll have a convenient reference guide when it’s time to decide what to do.

4. Understand Decision-making and Investment Style

There’s no one way to build wealth over time. How you invest and what you do with your investments are personal to you. By tracking why you made a particular investment, you can gain insight into your decision-making and investment style, which in turn can help you make future decisions with more confidence.

If you’re buying and flipping a house, experiment to find which approach works best for your skill set and your overall goals. If you’re selling for-sale-by-owner, you can keep all the profit, but you’ll need specific skills and experiences to succeed. With an agent, you’ll have an expert on your side, but you’ll have to pay a percentage of your earnings for commission. By selling to a company for cash, you’ll have a faster turnaround, but you’ll typically sell below market value.

When you look back at your investment journal, you can see what makes the most sense for you financially looking forward. You can remove the guesswork, and make future decisions with a keen understanding of why it’s the best option for you.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.

How Real Estate Investors Can Survive a Market Downturn

When COVID-19 shut down much of the world in early 2020, the S&P 500 began a 34-percent plummet. Given the widespread impact of the virus, a significant drop was to be expected. Less expected, however, was the speed of the following recovery.

In just six months, the S&P 500 recovered most of its losses and more. This turnaround was one the fastest in history, bolstered by government programs that helped individuals and businesses to stay afloat during lockdowns.

While a real estate market crash is not inevitable, 2022 could see a slowdown in growth. As an investor, it’s important to prepare for what comes next.

Steps to Survive a Market Downturn

When the Fed announced a series of planned interest rate increases aimed at slowing down inflation, investors shuddered. After all, low rates have allowed first-time investors to enter the real estate market and veteran investors to rapidly expand their portfolios. With interest rates going up, housing stocks shrinking, and prices rising, it seems likely the market will experience a correction.

But preparing for a downturn is possible. For real estate in particular, there are six steps you can take to protect your investments and come out the other side stronger than before.

1. Plan for Worst-Case Scenarios

Start by figuring out where you would be if every tenant at each of your properties paid rent 30 days late. Go one step further, and calculate what would happen at 60 days or 90 days.

While you’re at it, imagine that your property occupancy rates dropped by 10, 20, or even 30 percent. Envision what would happen if the value of your property dropped dramatically.

While this might seem pessimistic, looking ahead to the worst-case scenario for your real estate investments can help you develop a plan to handle it.

2. Get a Grip on Expenses

There are two types of expenses: fixed, and variable. Fixed expenses are unchanging, and unlikely to be affected by a real estate market surge or a real estate market downturn.

They include things like:

  • Routine repairs
  • Property tax
  • Mortgage payments

Variable expenses can include improvements on properties that are unrelated to regular maintenance. Looking ahead to a market downturn, evaluate which improvements will give you the best ROI — and which can wait.

3. Cultivate Better Relationships with Tenants

The heart of your real estate investment isn’t the property you buy — it’s the tenants inside.

Don’t let worrying about money cloud the fact that real estate is, at its core, about people. Cultivating better relationships with tenants is key when the market gets tough. This starts with improved tenant screening, keeping your properties in good shape (even when the rent is late), and working with tenants who are struggling.

4. Stay Focused on your Goals

You got into real estate investment for a reason. Hopefully, you laid out both short- and long-term goals before you got started. A market downturn is a good time to revisit those goals and make sure you’re making decisions aligned with your objectives.

Ask yourself:

  • Is your portfolio as diverse as you’d like?
  • Are your properties performing well historically?
  • If you’re looking at potential purchases, are you compromising or sticking to your investment criteria?
  • Is there another investment space you can move into (e.g., FSBO properties)?
  • If you’ve liquidated a property, can you use a 1031 exchange to defer taxes?

If you haven’t taken the time to outline clear goals, use a potential market downturn as a time to look ahead with a clear plan.

5. Build Up a Cash Reserve or Open a Line of Credit

Even with perfect planning, you may find yourself in need of quick cash. Building up a cash reserve is the real estate investment equivalent of making hay while the sun shines.

Consider the following actions to help ensure easy access to the funds you need:

  • Open a line of credit on a property
  • Delay a major purchase and store the cash
  • Sensibly liquidate a property (before the market drops)

6. Don’t Panic

Panicked investors may be tempted to liquidate their portfolios, unloading stocks and properties before they lose a penny of profits.

Resist this urge. With housing starts and construction permits up heading into 2022 and home prices still on the rise, it’s wise to sit tight to see what happens. While strategically unloading poorly performing properties or other investments can free up cash, history shows us gradual corrections are more likely than disastrous downturns.

Stay informed, and don’t make hasty decisions.

Good News Going Forward

The good news is that even in some of the worst financial crashes, real estate remains remarkably stable. Taking these six steps can help stabilize your portfolio and protect you from whatever the future holds.

 

Luke BabichLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.