Tax advantages?

Question

Hi.  I am just getting started as a real estate investor.  I am about to close on a single family property which I'm paying 39K for.  There's a Section 8 tenant who pays $675 per month.  I'm using my HELOC on my residence to pay for the property.  I'm anticipating about $225-$250 per month cash flow after all expenses and debt service.  My question is, what are the tax advantages involved?  I understand I can depreciate the property value to offset capital gains I might have in stocks (not this year :cry: ), and that I can deduct the interest on my HELOC.  Anything else?

Will Barnard · Answer

Did you listen to the correct week Rich?
            Week of Oct. 23, 2008, second segment. Mark explained the three IRS categories: Passive investor, active investor, and RE professional (also known as dealer). If you listened to the correct week, you would certainly have heard this.
            One of the potential negatives is that you could incurr self-employment tax on your RE transactions. Now there are strategies to assist you here, but my point was ONLY to say that it may, or may not be beneficial for an individual investor to be classified as a RE pro as classified by the IRS.
            This classification has nothing to do with "being in the business" or not. All three categories involve being in the business of RE investing. Each has its own advantages or disadvantages as the case may be, for each individual. If your CPA and you have decided that you will benefit most from the highest classification, then great Rich.
            I do not see where your choice to argue here is coming from. i merely pointed out that being classified as a RE professional in the eyes of the IRS may not be right for everyone, nothing more.
            
            Each person should consult with their CPA/tax advisor to make the best plan that fits there goals and strategies. Wouldn't you agree?
            By the way, if you are a RE pro, as class. by IRS, most of your income is derived from RE investments, not other ordinary income, and therefore, a classification of active investor is sufficient for you. You can have unlimited passive losses offset passive gains (RE income). The 25k limit is only for ordinary income. Perhaps you are just missing the actual rules and tax guidelines associated with these IRS classifications. Again, being an active investor rather than a RE professional does not mean that you are "not in the business".

Rich Weese · Answer

Will- I listened to the entire hour!! I heard nothing about the disadvantage of being "in the business" of real estate. This makes a difference to the investor of up to $25K writeoff, or unlimited writeoff. I made high 6 figures and will pay ZERO income tax. I couldn't have done that without being in the business. When wouldn't it be good to be in this business and what are the 3 classifications.Thanks.

Rich Weese · Answer

Dave V-- You may already qualify as a "real estate professional" As John said, it has nothing to do with having a license. There are MANY professions or jobs that would qualify.

Will Barnard · Answer

OK, I will. Glad you liked it!

Will Barnard · Answer

Very true Rich.
The liability protection with an LLC is "one-way" only.
It protects you from the asset, but not the asset from you.

Rich Weese · Answer

I liked that saying when your guest discussed it. Check my go zone reply to you. Very informative..

Rich Weese · Answer

No no no will- I'm not really arguing with your info. Absolutely contact a RE cpa and also a GOOD estate planning attorney. Most think that the LLC is a panacea. That is bs. It is only limiting you from problems with what is IN the llc on happens at or to properties in an LLC. Many think they are safe and they're not.

Will Barnard · Answer

Sue, I believe you are misunderstanding how depreciation works. You as a tax payer are not footing any bill on the depreciation. Now section 8 is an entirely differnt animal. This is a government sponsored program, funded by our tax dollars, yes.

Rich & Dave V.,
Being classified as a RE professional by the iRS, may or may not be a good thing, assuming you meet the qualifications. This is a matter that has a variety of opinions as to the benefit or non benefit of the classification. It is not for every individual. In fact, in my experience and knowledge, it is seldom beneficial for the typical investor, be that part or full time. There are disadvantages to the classification.
I highly recommend you speak to a knowledgable CPA or tax attorney on this matter. It is not something you base your decision on from the opinions of individuals on a public forum.

Will Barnard · Answer

We had one of our CPA/Tax attoirneys on our radio show to discuss this very topic. You may find a recorded podcast on my website (radio show link) to listen to it. Our guest attorney/CPA was Mark Koehler, author of "Lawyers are Liars".
            
            No sales pitch here, just info on the subject.

There are actually three IRS classifications for real estate investors, talked about on the show.

Sue Smith · Answer

"Mortgage ($39K, 30 yr, 7%): $259"   So you mean our tax dollars are paying this poor person's rent at 675 a month when this person could buy the place and pay only 259.  The first thing I would do is complain to HUD someone is getting ripped off..  And we all know it is not the person renting or owning the house..  It is us taxpayers..   Hopefully under Obama, scams like this will not continue.

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