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Can Real Estate Investors Use 401(k)s to Lower Their Taxes? Oh Yes

Taxes, how do I loathe thee? Let me count the ways.

Fortunately, real estate investors (as self-employed people) can take advantage of 401(k)s just like W-2 employees can, to invest a certain amount of money each year tax-free for retirement. And the good news does not stop there – they can even invest in real estate as their 401(k) retirement investment!

But there are plenty of details that investors should know before they jump off the diving board.

First, individual (or solo) 401(k) accounts are for self-employed people who own sole proprietorships or partnerships (such as LLCs created for real estate ownership), but have no employees (other than spouses, who are allowed). Real estate investors with employees can set up normal 401(k) accounts and benefit that way.

There are contribution limits, of course. For tax year 2013, self-employed people can contribute a total of $17,500 as their “employee” limit, but can also contribute as the employer, up to 25% of their self-employment income (to a maximum total contribution of $51,000).

8 Ways to (Legally) Beat Capital Gains Taxes

Real estate investors are particularly affected by capital gains tax rates, given they must pay capital gains taxes on profits from real estate held longer than one year.

Capital gains taxes are on long-term profits from investments, such as sales of real estate and stocks, and dividends. “Long-term” is defined by Uncle Sam as being held for at least 366 days; gains from assets owned for less than a year are taxed at the normal income rate, the maximum rate of which rose in 2013 from 35% to 39.6%.

As of tax year 2013, long-term capital gains tax follows a bracket system, where people earning different amounts of money pay different tax rates on capital gains. Single filers making less than $36,250 and married filers earning less than $72,500 pay 0% capital gains tax, while single filers making $36,251-400,000 and married filers earning $72,501-450,000 pay 15% capital gains rate. Singles earning more than $400,000 and married couples earning more than $450,000 pay a higher 20% capital gains tax rate.