Decreasing Tax Liability as a Property Owner
Everyone needs to file a tax return. But how good are you at limiting your tax liability and maximizing your deductions? Read on to hear answers to your frequently asked questions on decreasing tax liability.
What can I do with an investment that went bad?
Many investors face this issue. Be strategic in your planning. The losses can be deducted from your current tax return on either future income or from previous years. This is called a “Net Operating Loss (NOL) carry back.”
This strategy can generate additional refunds. If you lost $500,000 on an investment, for example, the IRS may create a Net Operating Loss of $350,000. As taxpayer, you have the right to carry the loss forward or back two/three years. This can result in refunds from prior year taxes or an offset for future income. This type of planning can turn a bad investment into an opportunity to increase cash flow or reduce future income.
Should I have my rental properties in an LLC?
From a tax standpoint, a Limited Liability Company (LLC) has various tax benefits. The LLC can be a single member, multi-member, or elected to be taxed as a corporation. Each option provides a unique set of advantages and disadvantages. The choice depends on the tax situation of the individual.
LLCs are also subject to fewer audits statistically than a Schedule E on an individual return. In addition, LLCs provides a layer of asset protection.
What are the most audited deductions?
For landlords, the most audited deductions are repairs on a property. The IRS verifies expenses that are deducted within the category of “wear and tear” repairs vs. capital improvements. Capital improvements are deductible over a period of 27 ½ years for residential rental properties.
Am I a real estate professional?
The requirements are as follows:
- More than 50% of the individual’s personal services during the tax year are performed in real property trade or businesses in which the taxpayer materially participates.
- The individual spends more than 750 hours of service during the year in real property trades or businesses in which the taxpayer materially participates.
- Real estate has to be over 50% of your time and income. One tax benefit is the ability to deduct 100% of your rental property losses against other sources of income. The real estate professional classification can be used as a power tool to offset income and minimize your tax liability.
What activities count towards my hours to be classified as a real estate professional?
A real property business is defined as a real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business IRS 469(c). This includes real estate investors who do rentals, management, rehabbing, wholesaling, retailing, foreclosures, short sales, commercial, brokerage and many other types of real estate activities. Many activities fulfill the IRS hourly requirements and can be easily documented.
Real estate investors should not be afraid of the IRS as long as time and expenses are documented. The most important thing is to have a solid strategy in place when embarking on any real estate venture. Through proper planning your taxes will be minimized.
The above answers were provided by Robert Hall & Associates. For more information about Robert Hall & Associates, visit www.RobertHallTaxes.com or call 818.242.4888.