6 Real Estate Tax Mistakes That Could Cost You Thousands

TL;DR

Learn six common real estate tax mistakes and how to avoid them.

Transcript

hi i'm amanda han and i'm matt mcfarland with keystone cpa and thank you for joining us as we go over the top six real estate tax mistakes that you need to avoid mistake number one is believing that i need an llc to write off expenses you ever heard that before yeah this is a common one where people think or people are told that they have to have a... Read More

Key Insights

• Real estate investors can write off expenses without an LLC. The IRS views all real estate investors as business owners, allowing deductions for expenses like travel, business meals, and home office use.
• The home office deduction is not a red flag for the IRS. Many Americans work from home, and the IRS has simplified the process with a standard deduction.
• Being a real estate professional allows high-income investors to offset other income with rental tax losses, but it does not require a realtor license. It's based on the hours spent in real estate activities.
• All real estate investors can take deductions, regardless of professional status. Deductions include rental income, expenses, and depreciation, which are available to all investors.
• Depreciation must be claimed correctly, based on the purchase price of the building, not the market value or down payment. Many investors miss out on this significant tax benefit.
• Tax planning and tax return filing are different processes. Tax planning involves proactive strategies throughout the year to minimize taxes, whereas filing is about reporting past financial activities.
• Proactive tax planning is crucial for minimizing taxes. Meeting with a tax advisor throughout the year can help identify strategies to reduce taxable income effectively.
• If your tax preparer doesn't offer proactive planning, consider working with a specialized advisor to explore options for tax savings before transactions occur.

Questions & Answers

Q: Why don't you need an LLC to write off real estate expenses?

An LLC is not required to write off real estate expenses because the IRS considers all real estate investors as business owners. This means that regardless of whether you own rentals individually or through an LLC, you can deduct common expenses like travel, business meals, and home office expenses.

Q: Is the home office deduction still a red flag for the IRS?

No, the home office deduction is not a red flag for the IRS. While it might have been considered risky decades ago, the IRS now recognizes that a significant portion of Americans work from home. They have even introduced a standard deduction to simplify claiming this benefit.

Q: What qualifies someone as a real estate professional for tax purposes?

To be considered a real estate professional for tax purposes, one must spend a certain number of hours on real estate activities, not necessarily hold a realtor license. This status allows high-income investors to utilize rental tax losses to offset other income, providing significant tax benefits.

Q: Can only real estate professionals take deductions?

No, all real estate investors can take deductions, not just professionals. Regardless of professional status, investors can deduct rental income, expenses, and depreciation. The real estate professional status mainly affects the ability to offset other income with rental tax losses.

Q: How should depreciation be claimed on rental properties?

Depreciation should be claimed based on the purchase price of the building, not the market value or down payment. Investors often overlook this significant tax benefit, which can lead to substantial tax savings. It's crucial to ensure depreciation is calculated correctly to maximize deductions.

Q: What is the difference between tax planning and tax filing?

Tax planning involves strategizing throughout the year to minimize taxes, while tax filing is the process of reporting past financial activities. Tax planning allows for proactive measures to reduce taxable income, whereas filing is merely a historical account of what has already occurred.

Q: Why is proactive tax planning important?

Proactive tax planning is important because it helps identify strategies to minimize taxes effectively before transactions occur. By meeting with a tax advisor throughout the year, investors can explore options for reducing taxable income, ultimately leading to significant tax savings.

Q: What should you do if your tax preparer doesn't offer proactive planning?

If your tax preparer doesn't offer proactive planning, consider working with a specialized tax advisor who focuses on this service. Proactive planning is crucial for identifying tax-saving strategies before transactions occur, ensuring that you maximize your deductions and minimize your taxable income.

Summary & Key Takeaways

• Amanda Han and Matt MacFarland from Keystone CPA discuss common real estate tax mistakes, emphasizing that an LLC is not necessary for expense write-offs. They clarify misconceptions about home office deductions and the criteria for being considered a real estate professional.

• They explain that all investors can take deductions, regardless of professional status, and stress the importance of claiming depreciation correctly based on the purchase price. They highlight the difference between tax planning and filing, advocating for proactive strategies.

• The video encourages viewers to engage in proactive tax planning with their advisors to minimize taxes effectively. It also provides resources for further learning and invites viewers to comment on their experiences with tax mistakes.