As 2020 lurches and grinds to its inevitable end, it can be easy to lose sight of some details in this year, one that was like no other due to the coronavirus pandemic (except maybe 1918, only with the internet).
The end of the year, of course, marks the deadline for a lot of tax deductions for individuals and businesses. And while 2020, among so many other things, included the IRS kicking filing dates down the road, it's probably best not to assume that will happen in 2021. Let's assume April 15 will mean something again.
Either way, you still need to have your ducks and documents in a row when filing time does come. So here are some things to do to get ready to deduct the new year away.
Get organized now, while the getting's good
As soon as the new year hits, you'll start receiving statements from lenders, brokerage firms, and the like. These will contain vital information for writing off interest and declaring income when you do file. Plus, if you sold, refinanced, or bought a property during the year, make sure you have the HUD settlement statement. It contains critical info you'll need come April 15.
Actually, you'll need it well before then. Now's the time to get organized. Either on paper or online, create a list of documents you know you'll need, and place the documents with them. Your most secure route would be to create digital files of everything you think might be relevant (I scan and save them all as PDFs) and then keep them in a folder that says something like "2020 taxes" in cloud-based storage (like Google Drive). I also print it all out and keep paper, too, as a backup.
Decide if this is your vocation or avocation
Is it your trade or business, or just a hobby? The IRS cares, and either way, time is money, especially when that, too, is a write-off.
For example, residential real estate investors such as house flippers, whether you buy and improve or just buy at auction and sell, need to know the IRS makes some pretty significant distinctions between how it views your profits; specifically, whether they're as a result of your "trade or business" or they're capital gains.
Why does it matter? Because business or trade income is treated as ordinary income. That means they're subject to the self-employment tax and likely to be taxed at a much higher rate than if they're considered capital gains.
And be sure to gather anything that documents how much time and money you spent on your real estate investing activities. Your Outlook calendar is your friend in that regard, especially if you want to prove you're a real estate professional and garner the tax benefits and deductions that can be used to offset your gains from that work and investment.
Buy materials and get work done now
You can deduct the expenses for materials and labor the year you paid for it, so if you want the tax deduction for 2020, buy what you need now, even if the work doesn't get done until later. Again, keep the proof.
Defer income if you think it might help next year
If you think this year's income might be significantly higher than what you'll net next year, you might consider deferring income from now until then. For instance, if you're a landlord, you can give your tenant a break and push rent that's due on Dec. 31 to Jan. 5, or something like that. It's a balancing act but worth spending some time thinking about while you're hunkered down for the pandemic-hindered holidays.
Harvest your losses while you reap your gains
Even in a year such as this, you may well have some investments that didn't pay off, especially if you had a significant stake in segments like hospitality REITs, or real estate investment trusts. You can engage in some "loss harvesting" here by selling them by year's end to offset any gains you made when cashing in winners. It's a dollar-for-dollar offset and not one you'll want to miss out on, so start thinking now about what you might want to shed before the clock strikes midnight.
Donating appreciated gains for a dandy tax deduction
This was a great year for a lot of real estate stocks and those who invest in them, including REITs in the right industries. And it's also a good year to pay it forward. Donating appreciated equities, or real estate for that matter, can offset some of those market gains you took, if you end up itemizing rather than taking the standard deduction. The market value on the day you actually make the donation is what matters here, so save the date and the proof.
The Millionacres bottom line
The holiday slow period (if you have one) is an ideal time to think about what you'll need come tax season. And, unless you're experienced in such matters, it's also opportune now to seek expert advice so you don't miss the opportunity to make any business-related moves that would secure the most favorable tax status for what you've achieved in this year that was.