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162016 EndshyofshyYear Tax Tips for Residential Real Estate Investors | Auctioncom

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Residential

End-of-Year Tax Tips for Residential Real EstateInvestors

Cynthia Badiey December 29 2015 0

As the year draws to a close so does the deadline for many tax deductions If yoursquore a real estate investor these deductionsmay be more top of mind than most people After all one of the reasons that many people invest in real estate is not just togenerate income but also to reap some tax benefits

I talked with an experienced investor and two financial planners about steps you should take before December 31 to maximizetax advantages if you own residential rental property or if yoursquore planning to ldquofliprdquo property you own now Note that if youlive in a property as your primary residence you are an owner-occupant and the tax rules especially around what you candeduct are very different

One caveat I am not a tax expert so the suggestions in this blog post are educational and informational only Consult yourtax advisor about your specific situation This brings me to my first tip

Donrsquot try to do your taxes on your own If yoursquore an experienced real estate investor you already know that real estate tax law is extraordinarily complex And if yoursquorea new investor or thinking about investing itrsquos something you should be sure you understand before you dive in

While you may be tempted to try to wing it with do-it-yourself tax software in an effort to save money itrsquos NOT worth the riskEveryonersquos situation is different It will be well worth your time and money to talk with your accountant or tax advisor to makesure you follow the best approach for your deductions And consult your tax professional long before yearrsquos endmdashand longbefore tax season ramps up

Gather all of your tax-related documents in one placemdashnow How often have you scurried around to gather tax documents in April when it comes time to prepare your tax returns Makethings easier on yourself Get a large envelope and in very large bold letters mark it ldquoTax Documents 2015rdquo Keep it near theplace where you set down your incoming mail and put any tax-related documents into it as soon as you receive them

ldquoOften people donrsquot even open an envelope marked lsquoImportant Tax Documentsrsquo believe it or notrdquo says Duane Haaland EAof Pacific Financial Income Tax Services in Roseburg Oregon

If you bought sold or refinanced any real estate during the year the escrow company will have sent you a final closingstatement also known as a HUD-1 Settlement Statement Be sure to include this document in your current-year taxdocuments because it contains information that will be very relevant to the tax return

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We define home flipping as the practice of buying a home repairing and improving its features and then putting it right backon the market for a quick (and hopefully profitable) sale Flipping can also include ldquowholesalingrdquo where one buys a homecheaply (at a courthouse auction for example) and without doing anything to improve it flips it to someone else for a fewthousand dollars in quick profit

Here are some things you should keep in mind for tax season if you flip homes As always consult with a tax advisor aboutyour specific situation

The IRS will probably treat your flipping activity as ldquoa trade or businessrdquo and your flips as inventory You and your tax advisor should have a firm understanding of what the IRS treats as a ldquotrade or businessrdquo and what it treats asa capital asset that can be bought and sold For property ldquoflippersrdquo the IRS considers the buying renovating and sellingprocess as a trade or business rather than a capital investment

ldquoIf yoursquove bought and sold multiple properties in a year the IRS looks at those properties as inventoryrdquo explains Haaland

Herersquos why that matters Income from a trade or business is treated as ordinary income (think Schedule C) and net profits aretaxed at a much higher rate than the maximum capital gains rate because theyrsquore subject to self-employment tax in addition tothe marginal rates of ordinary income tax Ordinary income can only be offset by net operating losses self-employmentincome is never netted against capital gains or losses

Try not to flip a property and close on it right before the end of the year Taxes take a big bite out of the proceeds of a flip so you may want to delay your closing until 2016 But if you buyer insists onclosing before yearrsquos end because they want to file for a homestead exemption for tax purposes (they have to be inpossession of the property on January 1 to qualify) it might be worth your while to pay the amount your buyer would save bypaying some of his or her closing costs suggests Ethan Roberts a real estate writer and Realtor whorsquos been investing in realestate since 1995

If yoursquore rehabbing a property buy your materials now If yoursquore planning on buying a property to flip near the end of 2015 (and a lot of people do close on December 30 or 31) youshould buy materials now rather than in the New Year so that the expenses are tax deductible for 2015 says Roberts

Do repairs before the end of the year If yoursquore hiring someone to do repairs on an investment property have the contractor perform the repairs now so you can takethe deduction for 2015

ldquoTypical repairs like fixing a fence having the heating or air conditioning unit repaired or fixing broken pipes may all be tax-deductible costs for flippersrdquo says Roberts

Howevermdashand this is a big ldquohoweverrdquomdashthe IRS may consider some major ldquorepairsrdquo such as re-roofing as improvementsrather than repairs and you may have to depreciate the cost over several years While this may be more applicable tolandlords than flippers consult your tax advisor

Have your property inspections done now Similar to the previous tip if you have the property inspections on your flip done before December 31 you may be able totake the deduction for 2015

ldquoYou may even be able to deduct a portion of the car expense for driving to the propertyrdquo says Roberts

Tax Tips for LandlordsIf you own residential property that you rent out there are some specific tax tips you should keep in mind

Talk to your accountant before assuming that a ldquorepairrdquo is tax-deductible With ongoing rental properties landlords must depreciate some expenses over several years as ldquoimprovementsrdquo while otherscan be deducted in full during the year the ldquorepairrdquo is done But it may not be clear which is which

ldquoYou lsquofixrsquo a leaky faucet with a new washerrdquo Roberts says ldquoRepair right Easy But what if you replace a leaky faucet with anew faucet Repair or capital improvement You could make a case either wayrdquo

The bigger the repair the trickier this issue becomes Roberts gives another example

ldquoLetrsquos say the rentalrsquos roof is getting old and you decide to re-roof the house before you run into problemsrdquo he says ldquoThatmight be considered a capital improvement and you have to itemize the cost over several years But now what if the roof isalready leaking and water is getting into the house If you have that fixed or put a new roof on was that a repair or animprovement

Moral of the story Work closely with your tax advisor when yoursquore deducting expenses

Consider delaying rent payments Depending on how your tax situation looks you may want to defer some income to 2016 One way to do that is to ask atenant who routinely pays rent before the first of the month to delay their payment until January 1 suggests Roberts Thatway the income goes on your 2016 taxes rather than on 2015

Think about paying HOA dues before the end of the year If yoursquore renting out property such as a townhome or condominium the homeownersrsquo association dues you pay are taxdeductible If these fees are due in January or February consider paying them early to get the tax break for 2015 Robertssuggests

Now letrsquos dip into some more complicated tax issues for landlords

Understand the difference between passive and non-passive rental income



Author Cynthia Badiey

Name

Email

Website

Comment

The IRS classifies real estate rental income as either passive or non-passive (also called ldquoactiverdquo) income In most cases the IRSconsiders real estate rental income to be passive income unless you are a qualified real estate professional (more on that in abit) Examples of non-passive income include wages business income or investment income Both types of income aretaxable

Understand the difference between passive and non-passive losses too Here comes the fun part You canrsquot use passive lossesmdashor incomemdashto offset your losses or income from non-passive activitiesFor example if you lose money on your rental real estate you canrsquot deduct that loss to reduce your wages or self-employmentincome

ldquoLetrsquos say you bought a house in San Francisco thatrsquos generating $100000 in income but after you deduct interestdepreciation repairs maintenance property you have a $30000 lossrdquo says Eric Rigby founder and principal of RigbyFinancial Group in New Orleans ldquoYou think lsquoWow This is great I can deduct that $25000 against my $200000 salaryrsquo Notso fast You have to look at the rules and determine whether yoursquore a passive or active real estate investorrdquo

Thatrsquos because as usual therersquos an exception If you or your spouse ldquoactively participatedrdquo in passive rental real estateactivity you can deduct losses up to $25000 from your non-passive income (like your wages) You actively participate if youmake key management decisions such as approving tenants setting rental terms or determining and approving appropriatecapital expenditures explains Rigby

But wait That $25000 is reduced if your modified adjusted gross income exceeds $100000mdashand eliminated altogether ifyour MAGI is higher than $150000 So the person making $200000 in our example above is out of luck

Find out if you could qualify as a real estate professional There is a situation in which your rental real estate activity might not be considered passivemdashand thatrsquos if yoursquore a ldquoqualifiedrdquoreal estate professional But the requirements are strict you must materially participate in these activities meaning that theymust represent more than half of your total personal services and total more than 750 hours per year

Document the time you spend on real estate activities If you want to be considered a real estate professional be sure to document activities such as consulting with architects andcontractors site inspections and interviewing potential tenants ldquoThis documentation can help demonstrate to the IRS that you are materially participating in managing your propertiesrdquo saysRigby

Itrsquos best to document the activities as they happen but you could just make a reasonable approximation of the hours youspent However you should back up your estimates by appointment records calendars andor narrative summaries

If you want to dive into the details of passive activities a good place to start is Publication 925 from the IRS

As you can see I wasnrsquot kidding real estate taxes are extraordinarily complex if yoursquore investor I havenrsquot even begun toscratch the surface of the various requirements and exceptions Use these tips to help you understand what your tax advisor istalking about when you meet with him or hermdasha meeting you should schedule sooner rather than later

Cynthia Badiey is editor of the Auctioncom blog

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More in Residential



We define home flipping as the practice of buying a home repairing and improving its features and then putting it right backon the market for a quick (and hopefully profitable) sale Flipping can also include ldquowholesalingrdquo where one buys a homecheaply (at a courthouse auction for example) and without doing anything to improve it flips it to someone else for a fewthousand dollars in quick profit

Here are some things you should keep in mind for tax season if you flip homes As always consult with a tax advisor aboutyour specific situation

The IRS will probably treat your flipping activity as ldquoa trade or businessrdquo and your flips as inventory You and your tax advisor should have a firm understanding of what the IRS treats as a ldquotrade or businessrdquo and what it treats asa capital asset that can be bought and sold For property ldquoflippersrdquo the IRS considers the buying renovating and sellingprocess as a trade or business rather than a capital investment

ldquoIf yoursquove bought and sold multiple properties in a year the IRS looks at those properties as inventoryrdquo explains Haaland

Herersquos why that matters Income from a trade or business is treated as ordinary income (think Schedule C) and net profits aretaxed at a much higher rate than the maximum capital gains rate because theyrsquore subject to self-employment tax in addition tothe marginal rates of ordinary income tax Ordinary income can only be offset by net operating losses self-employmentincome is never netted against capital gains or losses

Try not to flip a property and close on it right before the end of the year Taxes take a big bite out of the proceeds of a flip so you may want to delay your closing until 2016 But if you buyer insists onclosing before yearrsquos end because they want to file for a homestead exemption for tax purposes (they have to be inpossession of the property on January 1 to qualify) it might be worth your while to pay the amount your buyer would save bypaying some of his or her closing costs suggests Ethan Roberts a real estate writer and Realtor whorsquos been investing in realestate since 1995

If yoursquore rehabbing a property buy your materials now If yoursquore planning on buying a property to flip near the end of 2015 (and a lot of people do close on December 30 or 31) youshould buy materials now rather than in the New Year so that the expenses are tax deductible for 2015 says Roberts

Do repairs before the end of the year If yoursquore hiring someone to do repairs on an investment property have the contractor perform the repairs now so you can takethe deduction for 2015

ldquoTypical repairs like fixing a fence having the heating or air conditioning unit repaired or fixing broken pipes may all be tax-deductible costs for flippersrdquo says Roberts

Howevermdashand this is a big ldquohoweverrdquomdashthe IRS may consider some major ldquorepairsrdquo such as re-roofing as improvementsrather than repairs and you may have to depreciate the cost over several years While this may be more applicable tolandlords than flippers consult your tax advisor

Have your property inspections done now Similar to the previous tip if you have the property inspections on your flip done before December 31 you may be able totake the deduction for 2015

ldquoYou may even be able to deduct a portion of the car expense for driving to the propertyrdquo says Roberts

Tax Tips for LandlordsIf you own residential property that you rent out there are some specific tax tips you should keep in mind

Talk to your accountant before assuming that a ldquorepairrdquo is tax-deductible With ongoing rental properties landlords must depreciate some expenses over several years as ldquoimprovementsrdquo while otherscan be deducted in full during the year the ldquorepairrdquo is done But it may not be clear which is which

ldquoYou lsquofixrsquo a leaky faucet with a new washerrdquo Roberts says ldquoRepair right Easy But what if you replace a leaky faucet with anew faucet Repair or capital improvement You could make a case either wayrdquo

The bigger the repair the trickier this issue becomes Roberts gives another example

ldquoLetrsquos say the rentalrsquos roof is getting old and you decide to re-roof the house before you run into problemsrdquo he says ldquoThatmight be considered a capital improvement and you have to itemize the cost over several years But now what if the roof isalready leaking and water is getting into the house If you have that fixed or put a new roof on was that a repair or animprovement

Moral of the story Work closely with your tax advisor when yoursquore deducting expenses

Consider delaying rent payments Depending on how your tax situation looks you may want to defer some income to 2016 One way to do that is to ask atenant who routinely pays rent before the first of the month to delay their payment until January 1 suggests Roberts Thatway the income goes on your 2016 taxes rather than on 2015

Think about paying HOA dues before the end of the year If yoursquore renting out property such as a townhome or condominium the homeownersrsquo association dues you pay are taxdeductible If these fees are due in January or February consider paying them early to get the tax break for 2015 Robertssuggests

Now letrsquos dip into some more complicated tax issues for landlords

Understand the difference between passive and non-passive rental income




Name

Email

Website

Comment













Post Comment

More in Residential











More in Residential




Name

Email

Website

Comment













Post Comment

More in Residential











More in Residential