May 28th, 2014 Amanda Han CPA (Taxloopholes.com Tax Strategist)
As you know, here at Tax Loopholes we love the concept of using real estate as a wealth building vehicle. There are many tax benefits available to real estate investors but the issue sometimes is whether or not you understand the right ways to take advantage of them. As we head into summer this year, we wanted to share with you some of the most commonly heard myths this year.
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 The tax laws have changed so much over the years that many people are confusing new laws and rules with outdated and incorrect ones.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:
- 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.
- Myth: You must be a licensed realtor to get the unlimited tax benefits of being a “Real Estate Professional”.
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.
- 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 Act provided a temporary 50% bonus depreciation deduction for certain types of improvements made to qualified improvement properties placed in service through December 31, 2013. So be sure to take advantage of this before filing your 2013 taxes this year!
- 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.
To help you protect yourself with some proactive tax strategies, be sure to get a free copy of our eBook: 5 Cash Flow Strategies for Real Estate Investors. This is now available to you as a Free download. Click HERE to get your Free eBook today.
For more tax strategies and free educational information for your personal, business, and investing, visit our website at www.TaxLoopholes.com or call us at (877) 975-0975 and we will help you to increase your cash flow with cutting-edge tax saving strategies!