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As we reach the end of 2024, it’s the perfect time to optimize your finances and reduce your tax burden. Here are some key strategies to consider before the year ends:

1. Maximize Contributions to Retirement Account

One of the simplest and most effective ways to reduce taxable income is through contributions to retirement accounts.  

  • 401(k) Contributions: In 2024, individuals can contribute up to $23,000 to a 401(k) with those aged 50 and older eligible for an additional $7,500 catch-up contribution. 
  • Traditional IRA: For traditional IRAs, contributions are limited to $7,000, with a $1,000 catch-up for individuals aged 50 and over.  Contributions may be tax-deductible depending on income and retirement plan coverage. 
  • Self Directed IRA (SDIRA): a self directed IRA has the same tax advantages as a traditional IRA, however, it puts you in control of choosing your investments including alternative investments like real estate, private equity, private lending and much more.

Why It’s Important:  Leveraging retirement contributions before year-end can save thousands in taxes while helping investors build wealth over time.

2. Utilize Tax-Loss Harvesting

Real estate investors often have diversified portfolios.  Tax-loss harvesting can be a valuable strategy to reduce taxable income. 

  • Offsetting Capital Gains: By selling underperforming investments, an individual can offset gains from profitable sales. This can be beneficial if you’ve had a year with significant capital gains from real estate or other investments. Up to $3,000 in net losses can be used to reduce ordinary income, and excess losses can be carried forward indefinitely.
  • Maintaining Portfolio Balance:  Selling assets for tax benefits can be advantageous, but you must consider the impact on your overall investment strategy. 
  • Avoid the Wash-Sale Rule:  The wash-sale rule prevents you from claiming a tax deduction if you repurchase a “Substantially identical” investment within 30 days before or after the sale.

Investor Tip: Reviewing your portfolio before year-end can help individuals make tax-smart decisions while keeping your investment strategy intact.  Consulting with a financial advisor and your investment team can ensure you optimize your approach.

3. Capitalize on Expiring Tax Benefits

Several tax provisions that benefit real estate investors and business owners are set to change in 2025, making this an important year for strategic tax planning.

  • Bonus Depreciation for Businesses:  The current 80% bonus depreciation allows business owners to write off a large portion of qualifying asset costs, such as heavy machinery or equipment, in the year of purchase. This rate will drop to 60% in 2025. If you’ve been considering capital investments, it may be wise to act now to take advantage of this higher deduction. 
  • Child Tax Credit:  For those with dependents, the expanded Child Tax Credit may provide additional relief. In 2024, the credit is $3,600 for children under six and $3,000 for children aged 6 to 17, but this could revert to lower amounts if not extended by Congress. Make sure to claim any eligible credits before the end of the year.

Why It Matters: Staying informed about expiring or changing tax provisions can help you prioritize year-end financial actions. Real estate investors should keep an eye on legislative updates that may impact future tax benefits.

4. Evaluate Your Tax Withholding and Estimated Payments

For investors and business owners, income can vary significantly throughout the year, making it essential to review your tax situation regularly.

  • Withholding Adjustments: If you are a salaried professional or have a secondary income, use the IRS Tax Withholding Estimator to ensure your withholding aligns with your expected tax liability. Adjust your W-4 if necessary to avoid over- or under-paying taxes.
  • Estimated Tax Payments: Self-employed investors or those with substantial rental income should ensure they’ve paid enough in estimated taxes to avoid penalties. Review your income from real estate sales, rental properties, and other ventures. If you’re falling short, consider making a final estimated payment in December.

Pro Tip: Reviewing your tax obligations now can prevent costly surprises come tax season. Working with a tax professional can help fine-tune your strategy, especially if you’ve had a year of fluctuating income.

5. Leverage a 1031 Exchange for Real Estate Transactions

A 1031 Exchange is a powerful tool for real estate investors looking to defer capital gains taxes. Here’s how to make the most of this strategy before year-end:

  • Understanding 1031 Exchanges: Section 1031 of the IRS Code allows you to defer capital gains taxes by exchanging investment properties for like-kind real estate. If you’re planning to sell a property in Q4, initiating a 1031 exchange could defer the recognition of gains into 2025. This strategy requires strict adherence to timelines: you must identify a replacement property within 45 days and close within 180 days.
  • Tax Straddling Options: If you begin a 1031 exchange at the end of 2024 and the 180-day period extends into 2025, you may be able to defer gains into the 2025 tax year. If the exchange falls through, combining it with IRS Installment Sale rules (Section 453) could still defer taxes until the 2025 filing deadline.
  • Planning for Extensions: For exchanges started after October 18th, the full 180-day period would extend beyond the April 15th tax deadline. Filing an extension for your 2024 taxes allows you to use the entire exchange period without rushing. Note that filing deadlines vary by state, so check your state’s requirements.

Real Estate Insight: Properly structuring a 1031 exchange can provide significant tax benefits, but it requires careful planning and execution. Work with a Qualified Intermediary and consult a tax advisor to ensure compliance and maximize the advantages.

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