January 19th, 2011 Amanda Han CPA (Taxloopholes.com Tax Strategist)
For those of us who invest in real estate, the 2010 Tax Relief brings with it some really great opportunities as well as some significant pitfalls that we need to prepare for. In this section of our article series, we want to address some of the most common changes which will impact real estate investors as well as strategies that you can implement to take full advantage of the new tax cuts now available.
Next, let’s discuss some of the common tax changes that are relevant to real estate investors. For 2011 and 2012, the capital gains tax will remain at the lower rates of 15% or even 0%. This is a really important point. With the lowest capital gains tax rate remaining at 0% through the next 2 years, it is important that you understand how you can take advantage of this and pay zero taxes on the gain on sale of your investment properties. For taxpayers who are in the 10% or 15% income tax brackets, they may avoid having to pay capital gains taxes on any investment gains they may have. Even if you are above the 15% income tax rate, there are strategies that you can take advantage prescription drugs of in order to pay no taxes on the gain you make in your investments. As an example, if you have children who are in school, or parents who are retired, you can use family planning strategies to shift the gains on your investment properties to these other family members and take advantage of zero capital gains tax. If you were able to shift $60,000 of gain to your retired mom with this tax break, your overall tax savings as a family would be ~$9,000 per year. If you can shift another $60,000 of capital gains to your daughter in college, then you could be saving up to $18,000 for the year in tax dollars! If you plan on selling any investment properties for a gain in 2011 or 2012, definitely consider this strategy to take advantage of the 0% capital gains tax.
For real estate investors who use the installment sale method on any of their properties, the 2010 Tax Relief Act may present a pitfall for you down the road. Under the new tax changes, the capital gains tax is scheduled to rise to 20% starting in 2013 and beyond. What this means is that on future money you receive as part of your installment sale income, you may be paying a higher overall capital gains tax on that money as compared with the current tax rates. If you are an investor currently under the installment sale method, you should incorporate the latest tax changes as part of your overall tax planning to ensure that you are taking advantage of the low or zero capital gains tax rates under the 2010 Tax relief Act.
The new legislation put together yet another “temporary” patch for middle income tax payers under the Alternative Minimum Tax (AMT) patch. The AMT patch will save 21 million taxpayers that would have otherwise paid higher taxes for 2010. As an example, we have a client who owns a handful of investments properties and a management company in the state of California. The AMT patch will save him somewhere close to $7,000 in taxes in the 2010 year. Of course, we all know that when we as taxpayers save money, this means we are at the same time adding to our country’s deficit. The AMT patch alone is estimated to cost us $136 Billion dollars in 2010 alone. On December 1, 2010, a tax increase proposal was made which all real estate investors need to note. A proposed change, currently termed “the Super AMT”, will be aimed to severely or completely eliminate the mortgage interest deduction. Disallowing taxpayers and investors to take a mortgage interest deduction on their tax returns can have detrimental effects not only in our tax planning strategies, but it can also affect our real estate market as a nation. As it stands today, this is merely a proposed tax change and has not been enacted. As a CPA, taxpayer, home owner, and real estate investor, this is one proposed tax change I personally would do everything in my power to knock down before it gets off the ground.
In summary, there are a lot of other tax changes resulting from the 2010 Tax Relief Act. The $857 Billion dollar legislation includes some great opportunities for significant tax savings with the extension of the Go Zone deductions, dollar for dollar write-offs for certain business asset purchases, and a brand new 100% bonus depreciation. With all these great new tax breaks, there are a lot of strategies that we as taxpayers can now implement to get additional money back from the government. After all, that is the reason for these tax breaks, isn’t it? To get more money back into the pockets of taxpayers and businesses to stimulate the economy?
Before we get too excited about all the great new tax breaks, let’s not forget that there is one important piece missing from this puzzle that significantly impacts us as real estate investors. That is the “Unearned Income Medicare Contributions Tax” on investment income. Check back with us next week as we go more in-depth into this brand new tax that NO ONE is talking about and what we can do to protect ourselves from this little known monster.