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Smart Tax Investments to Consider Now

From real estate to IRAs, explore eight ways to increase your tax efficiency and protect your investments.

Luke Babich //April 13, 2022//

Smart Tax Investments to Consider Now

From real estate to IRAs, explore eight ways to increase your tax efficiency and protect your investments.

Luke Babich //April 13, 2022//

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.