Maximize Deductions Before December 31

In this episode of the Tax Smart REI podcast, we break down some of the most frequently asked questions (FAQs) about the short-term rental (STR) loophole.

As the year draws to a close, real estate investors can take specific steps to optimize their tax positions and prepare for a successful 2025. From leveraging deductions on property purchases to making strategic financial decisions, this blog covers practical ways to make the most of year-end tax strategies.

1. Short-Term Rentals: Make Your Last-Minute Investment Count

If you’re considering purchasing a short-term rental, year-end can be a great time to do it. By keeping the average rental period under seven days and meeting material participation requirements, you may qualify for significant tax benefits through the short-term rental (STR) loophole. This strategy requires planning, but it can yield substantial deductions if executed before year-end.

2. Vehicle Deductions for Business Use

Buying a vehicle for business purposes near year-end can offer immediate tax benefits if you meet certain criteria. If the vehicle weighs over 6,000 pounds and is used at least 50% for business, you can claim bonus depreciation on it. To maximize your deduction, consider using it exclusively for business in the final months of the year. This approach can increase your deductions significantly, especially if you maintain over 50% business use throughout the vehicle’s life.

3. Real Estate Professional Status (REPS)

If you’re aiming to qualify for REPS, it’s essential to track your time spent on property management carefully. For those who meet the REPS requirements, any properties placed in service before year-end can qualify for bonus depreciation, allowing investors to write off significant portions of their purchase. While meeting the REPS threshold requires commitment, year-end is a good checkpoint to ensure time logs are complete and accurate.

4. Cost Segregation Timing

A cost segregation study can enhance deductions by identifying portions of a property that qualify for accelerated depreciation. The good news? You don’t need to complete the study by December 31—just make sure the property is placed in service by year-end. You can finalize the cost segregation study before filing your tax return to lock in the deductions.

5. Tax Loss Harvesting for Capital Gains

Tax loss harvesting involves selling assets in a loss position to offset any capital gains or up to $3,000 of ordinary income. This approach is commonly applied to stocks but can also apply to real estate in certain cases. Remember, if you plan to re-buy an asset, make sure you comply with the 30-day wash-sale rule.

6. Charitable Contributions

If you itemize deductions, charitable donations can help reduce your taxable income. Consider strategies like donor-advised funds if you’re planning to make large contributions, as they offer flexibility in planning and deducting donations.

7. Retirement Accounts and Health Savings Accounts (HSAs)

For those with 401(k) accounts, employee contributions must be made by December 31 to count for the current year. IRA and HSA contributions, however, have a bit more flexibility, with a deadline extending to April 15 of the following year. Opening an HSA by December 31 still allows you to make contributions up until tax day, which can help reduce taxable income.

8. Prepaying Expenses and Essential Bookkeeping

If you’re anticipating certain expenses in the coming year—like tech purchases, property maintenance, or subscriptions—consider prepaying them to bring the deductions into the current year. Bookkeeping should ideally be done throughout the year, but if you’re behind, make sure everything is up to date before year-end to streamline tax filing.

9. Shifting Income to Children

For investors paying wages to their children, be sure to complete payments by December 31 and issue W-2s by January. This is a simple way to reduce taxable income while introducing children to financial responsibility.

10. Entity Structure and CTA Compliance

Evaluate your current entity structure and consult with a tax professional to determine if any adjustments are needed for 2025. Additionally, comply with the Corporate Transparency Act by filing required ownership information on the FinCEN website if you established entities before 2024.

Transcript

Intro: 0:00 – 0:12

Host:
You’re now listening to the TaxSmart REI Podcast, the number one tax podcast for Real Estate Investors.

Thomas:
Hey, thanks for tuning into this week’s episode. With the 10/15 deadlines officially behind us, it’s now time to talk about year-end tax strategies and the moves you can make to optimize your tax position before the clock runs out.

Promo: Year-End Tax Impact Event: 0:20 – 1:33

Thomas:
Are you ready to prepare for 2025 with strategies that can save you money? Whole CPA and TaxSmart Investors are bringing you the Year-End Tax Impact, a one-day virtual event designed to equip you with the tools you need to finish the year strong and plan for the year ahead. You’ll hear from top industry experts on topics like how post-election results may impact your investments and taxes, wealth-building strategies for 2025, and year-end tax-saving moves. VIP investors get exclusive access to a tax strategy panel and live Q&A to address your most pressing questions. Join us from the comfort of your home on Zoom. Reserve your free ticket at taxsmartinvestors.com/yearendtaximpact.

Main Content: Year-End Tax Strategies Overview: 1:33 – 1:38

Thomas:
Let’s dive into year-end tax strategies for real estate investors. We’ll touch on strategies for business owners and individuals as well. Ryan, what’s your favorite year-end tax strategy?

Year-End Strategy #1: Purchasing a Short-Term Rental – 1:38 – 2:46

Ryan:
Probably buying another short-term rental before the end of the year! It’s a big undertaking, but if you’re already interested in short-term rentals, it’s worth considering. Even though it’s a time-intensive process, I have clients who acquired short-term rentals near the end of the year, managed a few stays to keep the average rental period under seven days, and met material participation requirements. It’s not easy, but if you’re already planning to buy a short-term rental, year-end could be a strategic time.

Thomas:
Great strategy! Let’s talk about vehicle deductions next.

Year-End Strategy #2: Vehicle Deductions – 2:46 – 5:42

Thomas:
The vehicle deduction is another favorite of mine. If you buy a vehicle with a gross weight of 6,000 lbs or more and use it over 50% for business, you may qualify for bonus depreciation. Around year-end, you can sometimes achieve 100% business use, which maximizes your deduction. Remember, if you use it 100% for business until year-end, you must maintain at least 50% business use over the next five years to avoid recapture.

Ryan:
And make sure it’s appropriate for your business type. For real estate investors, trucks or SUVs are generally more suitable.

Year-End Strategy #3: Real Estate Professional Status – 5:42 – 8:36

Thomas:
If you’re pursuing Real Estate Professional Status (REPS), make sure you’re on track with your time logs. And if you’ve purchased properties, ensure they’re placed in service by year-end if you want to take advantage of 60% bonus depreciation. Remember, a long-term rental doesn’t need to be rented to qualify as “placed in service”—it just needs to be rent-ready.

Ryan:
Right, that’s different from a short-term rental, where you need guest stays to meet the STR loophole requirements. Also, if you’re investing in a syndication, grouping those investments with your rentals can be beneficial if you meet the 500-hour test for REPS.

Year-End Strategy #4: Cost Segregation Timing – 8:36 – 10:15

Thomas:
The good news with cost segregation studies is that they don’t need to be done before year-end. As long as they’re completed before filing your tax return, you can benefit. Just make sure the property is placed in service in 2024 if you want to claim 60% bonus depreciation.

Ryan:
And remember, it’s not about attaching the study to your return; your tax preparer will use the study information to apply it to your depreciation schedule.

Additional Strategies: Tax Loss Harvesting & Charitable Contributions – 10:15 – 12:35

Thomas:
Tax loss harvesting is another strategy, especially if you have capital gains to offset. You can sell assets at a loss before year-end to offset gains, up to $3,000 against ordinary income. Just be mindful of the wash-sale rule.

Ryan:
And charitable contributions! If you itemize, charitable deductions can be a good way to reduce taxable income before year-end. Consider donor-advised funds if you’re looking to bundle contributions.

Retirement Accounts & HSA Contributions – 12:35 – 15:03

Thomas:
With retirement accounts, remember that 401(k) employee contributions must be made by 12/31. IRA contributions, however, can be made up until 4/15 of the following year. HSAs also have the 4/15 deadline, but the account must be opened by year-end.

Ryan:
And remember, Roth IRA contributions don’t provide immediate tax savings, so be mindful of the type of account you choose based on your tax goals.

Prepaying Expenses – 15:03 – 17:27

Thomas:
If you have expenses or purchases planned for 2025, consider prepaying them to accelerate deductions into 2024. Common items include vehicles, tech purchases, and subscriptions. It’s a great way to maximize deductions, especially if you expect to be in a high tax bracket.

Ryan:
If you know you’ll pay for it anyway, and you have the cash, consider moving that expense into this year to potentially save on taxes.

Bookkeeping & Documentation – 17:27 – 24:11

Thomas:
Bookkeeping should ideally be an ongoing process. Having clean financials and documentation makes tax season easier and ensures you’re not scrambling for records. Start early to avoid delays.

Ryan:
For real estate investors, it’s crucial to keep thorough records, especially with contractors. Get W-9s before paying contractors to streamline 1099 filings.

Shifting Income to Children & Entity Structure – 24:11 – 26:49

Ryan:
If you’re employing your kids, make sure you’ve paid them before year-end and plan to issue W-2s in January. Also, review your entity structure with your CPA or attorney to make any necessary adjustments for next year.

Closing Remarks & Year-End Tax Impact Event Reminder – 26:49 – 32:49

Thomas:
As we approach year-end, don’t wait until the last minute! Take proactive steps now to ensure everything is in order.

Ryan:
Exactly! And if you’re interested, join us for our Year-End Tax Impact event on November 15th to learn more about these strategies. It’s free, with VIP options available. Register at taxsmartinvestors.com/yearendtaximpact.

Thomas:
And if you need tax assistance or are looking for a new CPA, request a free 30-minute discovery call.

Ryan:
If you’re a tax professional with real estate experience, we’re also hiring! Send your resume to onboarding@therealestatecpa.com.

Thomas:
Thanks for joining us today. We’ll catch you on next week’s episode of the TaxSmart REI Podcast.

Disclaimer: This podcast summary and transcript were partly generated and may contain some errors or miss key points from the audio recording.