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October 11th, 2011 posted by Amanda Han CPA (Taxloopholes.com Tax Strategist)

We have a very special announcement for those of you who invest in real estate…you do not want to miss this…our latest eBook: 5 Cash Flow Strategies for Real Estate Investors is now available to you as a Free Download. Click HERE to get your Free eBook today.

As both real estate investors and tax strategists, we have been working with real estate investors our entire professional careers. It’s amazing how much has changed over the past decade. Very often, our business owner clients would get themselves involved in real estate deals as a way to begin building some passive income towards retirement. Most investors know that real estate investing comes with some great tax saving benefits. However, a lot of people are often confused as to what tax loopholes they can actually use and just exactly how to use them correctly.

Of course, it’s no wonder that a lot of people are frustrated when it comes to taxes and real estate. The US tax code is one of the most complex in the world and it just keeps getting more complex by the day. The tax laws have changed so much over the years that many people are confusing new laws and rules with outdated and incorrect ones. We wanted to take this opportunity to clear the air with some of the most common misconceptions when it comes to real estate and taxes to hopefully provide you with some guidance on maximizing your tax benefits:

  1. Myth: There is a limit on how much you can write off for your real estate losses on your tax return.

    Fact: The answer is yes and no. There are a number of strict rules that determine how much you can write off against your tax return on your real estate expenses that will actually offset your tax liability in any given year. This means that even though you capture and report all of your real estate expenses on your tax return, you may or may not actually get an immediate benefit on those expenses to offset your current tax liability. See the next “myth” on how you can avoid these strict IRS limitations.

  2. Myth: You must be a licensed realtor to get the unlimited tax benefits of being a “Real Estate Professional”.
  3. Fact: First off, the Real Estate Professional status is a great tax loophole that allows investors to bypass myth #1 and to be able to take unlimited tax write-offs on their investment properties. However, there are two rules you must meet before you can qualify as a Real Estate Professional. First, an individual must spend more time on real estate activities than non-real estate activities during the year. Second, an individual must spend more than 750 hours during the year involved in real estate activities in which the individual materially participates. Remember, you must meet both requirements to qualify as a REP.

    On the other hand, there is a misconception that in order to qualify as a real estate professional, one must have a realtor’s license. That is a false assumption since there are no licenses that are required for a taxpayer to receive the benefits of being a REP…you simply must meet the 2 criteria’s above.

  4. Myth: You cannot write off the entire cost of improvements for your investment property. It must be capitalized and depreciated over its useful life.

    Fact: This is false. The amount you can deduct this year actually depends on your specific investment as well as when you made the improvements for your property. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides a temporary 100% bonus depreciation deduction for certain types of improvements made to qualified improvement properties placed in service after September 8, 2010 through December 31, 2011.

  5. Myth: You can’t claim a home office deduction if you own real estate because it is a red flag for IRS Audits

    Fact: This is not entirely true. There are certain rules and guidelines you must meet before you can claim a home office deduction. You may take a deduction for home office expenses as long as the space you claim is exclusively used for business (i.e., a separate room, not your family room) and you regularly do some type of business in that space. If you own a real estate business or invest in a number of real estate properties and manage over these properties in your home office, you may qualify to take this deduction. As long as you qualify for this wonderful tax loophole, why not take advantage of it? The best part is there is actually a way to be able to take the tax deduction for a home office deduction and fly under the IRS radar too.

We all know that it’s important to keep ourselves educated and up to date with law changes. This could mean savings of hundreds to thousands of dollars in taxes year after year. Take for example the Unearned Income Medicare Contributions Tax coming in 2013. This new tax is assessed on Net Investment Income such as rental income for another 3.8% on top of all the regular taxes you already pay! Of course, here at Tax Loppholes, we are already working diligently to come up with creative tax strategies to minimize or eliminate this new tax burden for our clients. Being aware of the new changes can help you plan and strategize so that you can avoid these taxes when the time comes.

Again, our latest eBook: 5 Cash Flow Strategies for Real Estate Investors is now available to you as a Free download. Click HERE to get your Free eBook today.