Alabama Investment Property: Knowing What You Can Write Off on Your Taxes

It takes careful planning to provide for your income in retirement, and real estate investments offer fantastic tax benefits to investors. These laws exist to encourage investments in the real estate market through incentives. Missed opportunities to keep more of your income can add up over time, and knowing what you can write off the taxes on your Alabama investment property can help guide your decisions and increase your profits over the long term. But, of course, real estate investing is a business, so you should treat it as such. In addition, each of these laws has qualifiers and complex nuances, so it is always recommended you work with a tax advisor to help. 

You should begin developing methods in your daily work habits that improve your odds of building a prosperous portfolio. Organized record keeping is imperative, so you will want to develop a system that makes it easy for you to succeed. It is disheartening to consider the profits that uninformed real estate investors allow to slip through their fingers because of disorganization; you will need those receipts. Missed opportunities to keep more of your income add up over time. In addition, understanding what is not an allowable deduction can keep you from veering off the pathway to deductions.

If you would like to avoid missing out on your allowable deductions and be more prepared for meeting with a tax professional, read more about what you can write off of the taxes on your Alabama investment property.

Passive or Non-Passive

It’s essential to consider the differences between passive and non-passive real estate investment income and how tax law treats each. You can further benefit from these tax laws if you are not a material participant in your real estate investment business. In other words, as a passive investor, you can write off the taxes on your Alabama investment property through passive losses on your passive income. Document the time you spend actively participating in business activities and whether you wish to be treated as a real estate professional when you file your taxes. Suppose you spend more than half of your time participating in business activities or more than 750 hours. Then, you may be considered a “qualified” real estate professional in the eyes of the IRS.

Write-Offs

If it has to do with your investment properties and isn’t an improvement, but a necessary part of maintaining, managing, or the expenses you may incur for operations in your portfolio, are all areas of allowable deductions for real estate investors on your Alabama investment property.

Depreciation

One of the most significant tax advantages for real estate investors in Alabama is the ability to use depreciation. Depreciation allows you to deduct a portion of the property’s value from your taxable income each year, even though it doesn’t involve any direct cash flow. This is because depreciation is based on the gradual wear and tear or aging of the property over time. The IRS allows different timelines for different asset classes within your property. For example, residential rental properties typically depreciate over 27.5 years, while commercial properties may have a depreciation timeline of 39 years. It’s important to note that land itself doesn’t depreciate—only the improvements, such as the building and other structures, qualify for depreciation. This means that by properly accounting for depreciation, you can significantly lower your taxable income and, as a result, reduce your overall tax burden. However, it’s crucial to consult with a tax professional to ensure you’re applying depreciation correctly and optimizing it for your specific situation, as tax laws and rules can change.ments.

Pass-Through Deduction

You should also be aware that you can write off the taxes on your Alabama investment property through the pass-through deduction, or the Section 199A Qualified Business Income (QBI) deduction is in effect until the end of 2025 and allows for a 20 percent deduction on income from rentals on qualifying properties.

Capital Gains

Understanding how capital gains impact the taxes on your Alabama investment property is essential for maximizing your returns. When you sell a property, the profit you make is subject to capital gains tax, which can be either short-term or long-term, depending on how long you’ve owned the property. Short-term capital gains apply if you sell the property within one year of ownership, and they are taxed at ordinary income tax rates, which can be significantly higher. On the other hand, long-term capital gains apply if you’ve held the property for over a year, and these are taxed at a lower rate, typically ranging from 0% to 20%, depending on your income bracket.

To maximize your deductions and reduce your tax liability, it’s important to understand how these different tax rates work and plan your sales accordingly. For example, holding onto an investment property for more than a year can significantly reduce the tax rate you pay on your profits. Additionally, there are other strategies you can use to minimize capital gains taxes, such as taking advantage of the 1031 exchange, which allows you to defer taxes when reinvesting the proceeds from the sale of one investment property into another similar property. Being proactive and informed about the tax implications of capital gains can help you develop a solid strategy to minimize taxes and maximize the benefits of your real estate investment. Always consider consulting a tax advisor to ensure you’re making the best decisions for your specific financial situation.

Incentive Programs

You should also be aware that you can write off the taxes on your Alabama investment property through 1031 exchanges and investing in opportunity zones. In addition, you may defer the profits on selling a property with a 1031 exchange until you sell the following property; unless you decide to reinvest, you can continue deferring the profits. However, with a qualified opportunity zone fund, you may defer until the property sells or on December 31, 2026, whichever comes first. 

Special Loss Allowance

You should also be aware that through the special loss allowance, you can write off up to $25,000 of the taxes on passive income for your Alabama investment property for qualifying individuals.

Why not work with a team of professionals experienced in real estate investments that stay up-to-date on how current tax laws affect investors, like a local professional investor at Hapa Homebuyers? When you work with our professional investors at Hapa Homebuyers, we will help you find the perfect property for your investment strategy so you can write off the taxes on your Alabama investment property. Let the pros at Hapa Homebuyers help you earn the highest possible returns on your investment dollar. And don’t forget to ask about our current inventory of the best properties available. Call Hapa Homebuyers at 256-588-8622.