Year End Tax Saving Tips for Real Estate Investors

At this time of year, it’s important for real estate investors, landlords, property owners, and vacation owners to take advantage of tax-saving opportunities. Tax planning should be a priority so you can reap the rewards when tax filing time rolls around. Here are some year end tax strategies to use, but you must take action before December 31st.

Rental Income
To prepare for any future tax hikes, you should accelerate any rental income by receiving January rental income in December. Income timing can be difficult though and you should consider its impact on various deductions.

Rental Expenses
You can accelerate many types of rental expenses such as: paying bills early and buying equipment or services needed for the rental property business. Your expenses can include printing, memberships, insurance, real estate education, cell phone services, and adverts. Don’t forget your largest deductible expense which is the mortgage – you can prepay the January mortgage to increase your interest expenses. If you hire employees, you can also prepay social security, medicare, and unemployment taxes.

Capital Gains or Losses
Consider tax-loss harvesting to offset any current year gains.Health Insurance Credit
Take advantage of the health insurance credit and deduct the cost of health insurance for any employees of your rental business. This could be worth up to 35% of premium costs.

Home Office Deductions
This is great because it lets you convert non-deductible personal expenses into tax-deductible business expenses. You can deduct space at home for office work, and if you use your garage to store furnishings or a lawnmower, you can deduct expenses for its use.

Employ your Children
Hire your off-spring to work part-time and deduct their compensation. They will love getting paid, and you will benefit from the deductions.

Disaster Losses
If you experienced any losses in your rental business due to casualty, disaster, or theft, it may be tax-deductible. Use the loss to your benefit.

Automobile Expenses
You can fully deduct car expenses paid exclusively for your rental business. You can use either actual expenses or standard mileage.

Travel and Entertainment Expenses
You can deduct travel and entertainment expenses due to traveling for your rental business. These can include; airfare, hotel bills, meals, and other expenses.

Expense Repair Costs
Got any repairs due on your properties? Don’t forget to deduct the expenses such as; repairing gutters, leaks, plastering, etc.

TOP TEN YEAR END TAX PLANNING CHECKLIST

1. If you own a business, do you have an EIN number, an operating agreement, and a separate bank account? IRS audits on small businesses especially real estate businesses have increased.

2. Have you recorded all the income and expenses related to the business on the business bank account? This is a huge audit item.

3. If you own an investment property that was foreclosed or sold as a short sale, have you considered the impact of the cancellation of debt income on your individual income taxes?Have you calculated the loss of sale of investment property?

4. If you generated any kind of active real estate income, have you considered restructuring your business to minimize the impact of self-employment taxes?

5. If you have significant real estate education expenses, have you registered a business in order to minimize your audit exposure by deducting these expenses?

6. If you have significant business expenses and already have a registered business, have you considered converting to a partnership to avoid an audit flag?

7. For homes that have been repossessed, do you know the rules on recourse vs. non-recourse debt?

8. Do you understand what your tax filing requirements are for the states where your business is registered such as annual filing, personal property tax returns, etc.?

9. If you own an investment property, have you considered doing a cost-segregation study in order to increase your depreciation expense?

10. If you bought or sold property this year, have you considered the impact of capital gains, adding rehab expenses to the basis of the property, and whether the holding costs (mortgage interest, taxes, and insurance) are deductible?

Here are some recent questions from my Blog:

QUESTION: I have two rental houses that are 400 miles from home. I understand that to deduct overnight travel expenses, I must spend over half the trip working on a rental. What if I spend six days total, two travel days, working on one rental one day and the other rental one day, and one day of leisure? Can I deduct travel expenses? When I drive there and work on both rentals, how do I split the travel expenses for each rental on schedule E? Divide mileage and expenses by two?

ANSWER: You can prorate based on the number of days so rental gets 2/3 and leisure gets 1/3. It is ok to divide the mileage and expenses.

QUESTION: I just bought an SFH through my LLC and I’m still not sure if I’m going to flip it or rent it. One thing weighing on my decision is taxes. If a single-member LLC owns a property, rehabs it, and sells it, are the profits deemed “business income” or “capital gains”? If I owned a home in my name, personally, I would probably rent it out for at least a year before thinking of selling in order to avoid short-term capital gains. Does this work with business owned properties as well? I also have a self-directed Roth 401k, so I’m wondering how my real estate profits will figure into my contributions.

ANSWER: To the first question regarding profits, it is regarded as Business income subject to self-employment taxes. 
To the second question on short-term capital gains – Yes, if the business is a pass-through entity, then it follows the same rules as our individual tax return rules. Need help with your year end taxes? Don’t get ripped off! Call Ebere for a FREE consultation HERE