Real Estate Articles

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Uncle Sam Giveth and Taketh Away

Benefit of ‘Real Estate Professional’ Classification & How to Qualify

Real Estate Tax Checklist
Don’t be a Lemming
Stay an extra day on your business trip and have some fun

Are the Workers you Hire in your Real Estate Business Employees or Independent Contractors?

Recognizing Rental Income

Uncle Sam Giveth and Taketh Away

$25,000 Loss Deduction for Real Estate Rental Activities

So often, we get excited about a deduction the IRS is giving us, only to find a catch or rule that takes it away. This holds true for the deduction on losses for rental properties. The maximum deduction, if you are not a real estate professional, is $25,000…but if your modified adjusted gross income is over $100,000 ($75,000 if you are married, filing separately), the deduction is reduced by 50%. The allowance is totally eliminated if your modified adjusted gross income is over $150,000 ($100,000 if married, filing separately).

But, but, but... there are more restrictions. Modified adjusted gross income?…What is that? We don’t have enough space to provide all the details here. And to make things worse, there are additional rules. For instance, you must actively participate in the real estate activity (yes you guessed it, there are a whole set of restrictions here too) and be a 10% owner.

On a positive note: these losses can be carried forward to a future year if your income drops below the limits mentioned above, if you have an operating profit on the rental, or if you sell the property. Eventually, you will receive a deduction for the losses.

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Benefit of ‘Real Estate Professional’ Classification & How to Qualify

Rental activities are considered passive activities unless the investor qualifies as a real estate professional. Passive activities limit the amount of losses you can deduct on a tax return. Generally, in the initial years of a rental with depreciation and mortgage interest deductions, losses are common and can reduce your taxable income significantly, and can create large tax refunds. If the losses are related to passive activities, they can be restricted, reduced to zero, and/or only used when the property is sold.

How do you qualify as a real estate professional? Here is a definition:

1) More than half of the services that the taxpayer performed in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated, and 2) the taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses.

Services performed as an employee do not count unless the taxpayer was a 5% or greater owner of the employer. Real property trades or businesses include development, construction, acquisition, conversion, rental, operation/management, or brokerage of real property.

For purposes of qualifying as a real estate professional, each of the taxpayer’s rental activities are treated as separate activities unless the taxpayer elects to treat all interests in rental real estate as a single activity. Failure to make the election can trigger passive loss limits for real estate professionals.

An accurate log of your rental activities must be kept on a daily basis to record the hours you work on your rental real estate. The log will be your biggest defense in an IRS audit.

2011 Real Estate Tax Checklist

What Your Real Estate Tax Professional Needs from You to Prepare your Income Taxes

It will soon be time to file your personal and business taxes for 2011. This year, more than years past, it will be important to have a Real Estate Tax Professional prepare your taxes. Not only will there be more rules to contend with this year, but Uncle Sam will be looking for more money to pay for the bailout. That means more IRS audits, so you will want to make sure the tax return is prepared properly and legally to your advantage.

I am including a checklist of items you should have ready for your Real Estate Tax Professional. This list will save you time and money and make your Real Estate Tax Professional very happy. We also send personal tax checklists to our clients. If you are not a client and would like a checklist, simply call our office and we will send you one.

2016 Checklist:

  1. Business bank account statements for 2016.
  2. Checkbook or returned checks, if no detail of transactions on bank statement.
  3. Business credit card statements.
  4. Cash expense receipts.
  5. Receipts or statements for personal credit cards used in business.
  6. HUD statements and/or contracts for purchases and sales during year.
  7. Copy of incorporation, or LLC documentation, if new entity was formed.
  8. Business and personal mileage; model and year of vehicle.
  9. If you are using QuickBooks, the data file on a CD or data file emailed to us.
  10. New clients should provide copies of personal and entity tax returns for the previous year.
  11. Copies of 1098s received for mortgage interest paid. (If you have multiple properties, indicate on the 1098s which properties they belong to. Make sure you have a 1098 for each mortgage you had during the year, including any second mortgage and/or refinances).

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Don’t be a Lemming

By the time this article reaches you, the election has come and gone. In fact, I’m writing this article on Election Day and I have no idea who our new President will be. From a business and real estate investing point of view, it really doesn’t matter that much. What does matter is that you continue working and growing your business. Stop listening to the media and all the bad news. There is nothing we can do about the bad news, but there is something we can do to grow our real estate businesses, or any other business you may have.

This is the time to apply those business building principles you have learned through MNREIA and other coaching seminars you have been in. You can also learn from the mistakes (I like to call them outcomes) you have made. We learn a great deal from our mistakes. Use this knowledge you have earned.

There are great deals to be had in a down economy, more than there will ever be when the economy is booming. Remember the age old principle; buy low sell high. We all know it, but how many times have we acted on it? I call it the lemming principle; we follow the herd even if it doesn’t make sense, when we should really be going off on our own.

I’m excited about this economy. Many are scared and go into a shell and don’t do anything. I think it is time to be bold and make things happen. It won’t be easy, but anything worth while usually isn’t.

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Stay an extra day on your business trip and have some fun

Have you noticed that airlines have reinstated the Saturday-night-stay-over rule for cheaper fairs? Hotels appear to be lowering their Saturday night accommodation rates as well. If you stay the extra day on your business trip, and the total cost of the business trip is lower as a result, your expenses for that day are deductible. Your meals and lodging expenses for the non-business day must be less than the cost of flying without the Saturday stay. You can do anything you like with the extra day—go to a sporting event, do some shopping, or spend the day at the beach.

If you are an employee, any reimbursements for the extra day’s meals and accommodation from your employer are tax free to you as well.

2016 Mileage Rates

As of January 1, 2016, standard mileage rates are as follows:

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Are the Workers you Hire in your Real Estate Business Employees or Independent Contractors?

This is a very important question for you to answer correctly if you have workers in your business. If the IRS audits the classification of you workers and finds that you set them up as independent contractors when they should have been employees, the penalties can be severe.

IRS Publication 15 states that generally a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. This publication along with Publication 15A contain additional rules.

You will generally be liable for all Social Security and Medicare taxes as well as income taxes withheld, including the employee portion, if you treated an employee as an independent contractor.

The IRS has been increasing audits in this area and has added new weapons. They are sharing information with individual states and have improved matching systems for Form 1099s, which are issued to independent contractors. Your workers can report your business to the IRS if they feel they were misclassified by filing a Form 8919.

To access a copy of the IRS publications, go to our website at; click on Tax Center on the left and then click IRS Forms and Publications at the bottom of the page. Then type 15 or 15A in the search bar.

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Recognizing Rental Income

I have found that investors often question what should be included as rental income. Hopefully the following will help clear this up.

What types of payments are included in rental income when received?

What types of payments are NOT included in rental income when received?