The Tax Benefits of Real Estate are numerous. Ted Lanzaro, author of the Tax Smart Landlord, is a real estate investor and CPA whose practice is focused on helping real estate investors.
Ted began working as a CPA for a firm where his clients were real estate investors. After he recognized the benefits of real estate investing, he started investing himself.
Like most investors, he started investing in single family properties, purchased, rehabbed and rented these properties. As his experience grew, so too did his portfolio. Together with friends, they purchased and grew a portfolio of smaller multifamily properties in SE Florida.
Since then, he has relocated to Connecticut where he currently invest passively in other syndicators projects..
Benefits of a Real Estate Focused CPA
The benefits of a real estate focused CPA are not always recognized by investors. It’s usually only after hearing Ted speak at an investor meeting that audience members will seek him out to discuss how they can improve their tax situation. Ted’s experience as an investor helps him connect with investors as an investor rather than just a tax theory CPA.
The difference between a generalist and a specialist is proportionate to your tax consequence. There are a lot of great CPA’s that know a little about a lot of different business types, but this is of limited use to someone whose business is primarily real estate. A real estate specialist makes it his job to stay up to date on the laws and opportunities to take advantage of the laws to better their clients tax situation.
The Benefits of Real Estate
The benefits of real estate are numerous. With a real estate focused CPA, you are more likely to take advantage of the legal opportunities to lower your tax bill. Benefits include:
- The ability to depreciate the asset, and expense the depreciation against income; lower income equals lower tax owed.
- Leverage the asset and expense the interest payments.
- Receive loan proceeds without tax consequence.
- 1031 Exchange into a larger property rather than pay capital gains from a sale.
Biggest Mistake Investors Make with Taxes
The biggest mistake investors make with taxes is hands down, failing to take advantage of the tax filing rules as they apply to deprecation. This failure combined not doing cost segregation studies nor writing off abandoned capital assets when they are replaced, add up to significant missed opportunities. He attributes this to the fact that the client’s prior CPA was not a real estate investor, and therefore did not fully understand the benefit of depreciation.
There are additional deductions available to you as a real estate investor that are often missed. One additional expense often missed is the miles driven to your properties while you manage them. Even if you cannot take advantage of the losses in the current year, it helps you to accumulate these losses for the future when you have a significant gain from a sale. These accumulated losses can then be used against your gain to lower your tax expense.
What Class of Investor are You?
Depending on class of investor you are, will dictate the opportunities available for you when filing your taxes. The taxpayer classifications available to you are:
- Passive: For the investor who invests as a limited partner in a syndication. You are not allowed to take any passive losses against your Ordinary Income.
- Active – For the investor who actively manages his property, they can expense up to 25,000 if their Adjusted Gross Income is less than $100,000. The ability to write off losses lessens as your income approaches $125,000.
- Real Estate Professional: If you work in Real Estate and spend more than 750 hours in Real Estate per year, you can expense 100% of your real estate expenses against your Adjusted Gross Income.
Any depreciation that you are not able to use in the current tax year, is carried forward to be used later. If not used prior to sale, you can use to offset the gain from the sale of the property.
The goal of investing in real estate is cash flow. The benefit of real estate is is amplified with the benefit of depreciation, in that the paper loss of depreciation against income can reduce your taxable income to zero. Keep in mind that if you keep the property long enough, you will eventually run out of depreciation, unless you exchange or recapitalize the building with new investment. The reason most investors are not concerned with this is because the present value of cash is worth more than cash received at a future date.
Selling a Property
Selling your property can cause a significant taxable event. Prior to selling, you want to engage your CPA to determine what your tax consequences will be, and if you can do anything to minimize the tax consequences.
If you elect to do a 1031 Exchange, you have guidelines you have to abide by to avoid the tax consequences. These include time lines and the use of an exchange intermediary.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: The Biggest Risk Real Estate Investors currently face are the local laws being passed in favor of tenants. These include environmental consequences, caps on rent increase, landlord fees charged by local jurisdictions, etc.
For more go to: http://lanzarocpa.com/