Quick Saving Tips for Real Estate Investors

Morning everyone~

Today is Tuesday. Hope you have a supreme week. 

For the second day of a new week, here are some quick tips to help you prepare for tax time.

• Don't Overtax Rental Income: Rent income is not subject to self-employment (social security) taxes. Too many tax accountants classify rent income as self-employment income causing the investor to pay another 15% in taxes.

• Create Valuable Depreciation Deductions: This is your most valuable deduction because it does not require you to spend any cash to get the deduction. You also get the deduction every year, plus when you sell, you have no recapture and don't have to pay any of these tax savings back by selling the property tax free via a 1031 exchange. You can extend these huge savings thru specialized compounding:

a) 5 year Personal Property: depreciate personal property over 5 years instead of 27 or 39 years. Examples include movable walls, kitchen cabinets, shelves, storage, carpeting and appliances.

b) 15 year land improvements – Land improvements are depreciated over 15 years.  Land improvements include; landscaping, fences, under ground sprinklers, paved surfaces, parking lots, etc.

c) 15 year Land improvements to building – Examples include; outside lighting and utility connections

d) Low land value maximizes depreciation deductions – The land portion of the cost of property is not eligible for depreciation deductions. Allocations toward depreciable land improvements reduce amount allocated to non-depreciable land.

e) Fully deduct remaining basis of components that are replaced (rehab)

• Generate Repair Deductions: This is where you want to use strategies to reclassify Rehab improvements into fully deductible repairs. There are many tax-saving benefits of classifying expenditures as repairs rather than capital improvements.

a) Be sure to separate invoices for each repair job between improvements and repairs.

b) Documents should be worded as 'repairs'. Certain words work in the taxpayer's favor such as; patch, temporary, minor, annual and repaint.

• Get More Deductions: Always look for overlooked deductions to get more savings such as: home office expenses, business travel and entertainment.

• Avoid Passive Loss Limitations: Deduct unlimited property tax losses even if they are over $25,000 or your income is over $150,000 as a real estate professional. Deductions can pile up so your properties will have paper tax losses which you want to fully deduct against your other income. Except for $25,000 of losses, rental property losses are subject to passive loss limitations.

This means real estate investors cannot deduct property tax losses against non-passive income such as salaries, business income, gains, IRA distributions, etc. To avoid this scenario, you must document at least 751 hours of time spent on the real estate property business. This will help you increase your cash flow each year.

• Avoid being a dealer: You must absolutely avoid the costly Dealer status. When you start doing real estate deals, the IRS may try to classify you as a dealer. This could be disastrous because you will be subject to the highest ordinary income tax rates plus social security taxes and alternative minimum taxes.

This means up to 50% of your hard earned money could disappear! Dealer profits also get taxed in full and cannot be tax-deferred. You can avoid this by by stating yourself as an 'investor'. There are many strategies to avoid the dealer status. One of the best is investment intent, which means to demonstrate the main purpose of quick sale profits is for investment purposes.

• Sell Your Properties Tax-Free: Avoid paying capital gains taxes on the sale of property. You can avoid the 25 – 30% on capital gains by:

a) 1031 Exchange: This is a 'rollover' of a like kind of properties that can avoid many tax liabilities. Examples include – rental houses, condos, duplexes and apartment building.

b) Reverse Exchanges – A way to bypass exchange deadlines and not rush into a bad deal. In a reverse exchange the closing is reversed so the replacement property is acquired before the closing of the relinquished property. This means you can do not have to rush when doing your deal and can look for below market bargains.

c) Self-Directed IRA – This is a great way to avoid taxes on gains, especially for quick flips. This strategy is recommended for real estate transactions that generate immediate income such as flips or options.