4 Bulletproof Strategies that Let Real Estate Professionals Cut Their Federal Taxes

Never Invest a Cent Without Considering the Likely Tax Impact on Yourself

Realtors and others in the real estate field see first-hand the steady increase in property values. Everyday, you assist both buyers and sellers to profit from it. You can spot the “good buys” and insider opportunities. But when you’re the buyer, don’t get so caught up in “the deal” that you forget to factor in the tax savings or costs that come with it.

Just as a property with critical easement problems deserves extra scrutiny, the same is true for any investment with tax complications. An investment (a real estate trade, for example) may look very different once the related federal tax consequences are calculated. Title defects shown by the title insurance report must be resolved before the closing. Be as careful to take into account tax scenarios that could diminish your true financial return going in.

I constantly travel the country, conducting 150 seminars a year for Realtors and financial professionals. As a former IRS employee and tax expert (CFP and Enrolled Agent) I remind audiences that it’s not how much you money make, but how much you keep that determines your true earnings. Being savvy about IRS rules helps you size up potential investments wisely, so you’ll keep more of what you earn in the long run.

1. Depreciation Saves Money Several Ways

Depreciation is different than all other business expenses, since you don’t have to actually spend those depreciation dollars to claim the expense. Yet depreciation gets to be added to the operating expenses, property taxes, and interest on the loan to offset the rental income. Since there’s usually a tax “loss” during the first five to seven years a property is owned, that shelters your other income from taxes from the first year you own it.

Full-time real estate professionals may be able to deduct 100% of their rental property tax losses from their income. That’s not true for people who spend less than full time as real estate professionals or rental property owners. Details are spelled out in the Internal Revenue Code 469(c)(7). The key factors for this deduction to apply according to IRS MSSP Guidelines (Feb. 1996) are this:

Beginning with the 1994 year, a taxpayer who meets ALL of the following can deduct current rental real estate losses in full regardless of how high his/her Adjusted Gross Income might be:

A. More than half of the taxpayer’s personal services in all businesses must be in real property businesses. A real property business is real property development, construction, acquisition, conversion, rental, management, leasing, or brokerage .

B. The taxpayer must spend more than 750 hours a year in real property trades or businesses.

NOTE: For time to be counted in either of the above two tests, the taxpayer must materially participate in the activity.

C. The taxpayer must materially participate in each rental real estate activity unless he or she has filed an election to group all rental real estate activities as one (for purposes of materially participating). See your accountant for more detailed information on this issue.

2. Re-think Your Interest Costs

Do not justify running up your debts to generate tax deductions. For an individual in the highest bracket, for every dollar of interest paid, the tax savings is only 35 cents. This means you paid 65 cents for nothing. (For an individual in the 28% bracket you paid 72 cents for nothing.) Don’t spend the money if the main reason you’re buying it is to “buy” a tax write-off.

When in doubt, remember the saying: Borrow to purchase appreciating assets, pay cash for depreciating assets.

3. Pay off Existing Debts

The rate of return on the funds used to pay of a debt is equal to the rate of interest being charged on it. For example, when you pay off a credit card where you owe $5,000, which bears an 18% interest rate, you have just guaranteed yourself an 18% rate of return on that money.

Some of the best investments are the easiest. And here’s a strategy that puts more funds into your pocket right away-that won’t even cost you any taxes.

4. Deduct All your Equipment Purchases the First Year

The IRS permits you to write off up to $100,000 of equipment the first year you buy it
(IRC 179 deduction). With the deduction limit so high, Realtors can deduct all their purchases of equipment – and that’s not limited to computers, desks, PDAs, etc. By significantly reducing your taxable income, the social security taxes that would be paid on it are also reduced.

Two concerns need to me kept in mind when you use this expensing election. Taxes saved must be repaid upon sale of the asset(s), but that amount will not be subject to social security taxation. The only exception regarding recapture (in the prior sentence) occurs when the business use of the asset falls to 50% or less.

Being Tax Savvy is the Mark of a Professional

Your long-term tax consequences are as important as PITI (principal, interest, taxes and insurance) when you’re assessing a real estate deal. For any investment or purchase to make sense, it needs to make good tax sense as well. That’s what determines how much money really ends up staying in your pocket in the long run.
Chris Bird, 1005

About the author:
Chris Bird Conducts 150 seminars a year for Real Estate and Financial professionals Wealth building, financial planning, residential rentals, tax strategies, accounting Certified Financial Planner (CFP) IRS Enrolled Agent Chris@ChrisBirdSeminars.com

Boom or Bust: Real Estate at the Jersey Shore

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I’ve sold real estate in Sea Isle City for the past ten years and everyone is now questioning whether the vacation destinations, along with almost every other major east coast city, is in a “Boom” or “Bust” in terms of Real Estate? The media is creating the “Bust” mode by all the attention it is giving it. A couple days ago on “Good Morning America”, Diane Sawyer was doing a segment on “The tricks of the trade” when it comes to Real Estate Agents, and at the very beginning, she mentioned that Housing Sales across the nation had been the highest ever the past few months. She immediately went into the segment and had nothing else to say about this very strong fact.

Had the housing sales been low or the lowest in the past few months, I can say without hesitation, that this would make the headlines and have several segments about it.The media creates the situations that happen because of their sensationalizing a topic. The media knows this will get the attention of their viewers and therefore get sponsors and advertisement.

Sea Isle City and the Jersey Shore currently have a lot of properties for sale, and I believe one of the reasons is because people panic over what they hear from the media. Many owners of properties that would have normally not been ready to sell are now putting their properties on the market because the media states that the bubble has busted and the real estate market is in for a bad time. Had the owners not heard this, the market would not be flooded with inventory.

On the flip side, the potential buyers are listening to the media and either deciding that it is not a good time to buy a property, or that there are bargains to be had and coming in with ridiculously low offers on properties. Either scenario results in properties not being sold and inventory being high.

I compare this situation to many years ago when the media told their viewers that there was going to be a shortage on toilet paper, so everyone went out and stocked up on toilet paper, which created a shortage. The media has a lot of power in influencing their viewers.

In conclusion, I feel that the market at the Jersey Shore is still strong, and once the buyers and sellers realize that property values are not going to “Bust” down at the Jersey Shore, buyers will once again start to purchase their “Dream Beach House”, and both buyers and sellers will be happy with their real estate investments. Everyone wants to own a part of the Jersey Shore!!!

About the Author

Joe Prato is a real estate agent specializaing in Sea Isle City Rentals. He currently keeps a Sea Isle City blog where he provides prospective vacationers with up to date information for their vacation.

Real Estate Investing – start with getting your own finances under control

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Real estate has been a driving force in world economies since the days of Babylon, one of the most fantastic developments the world has ever known, and the desire to create, not destroy, is alive and well.

To enter the realm of real estate development requires vision, direction, and risk acceptance, but a knowledgeable investor will take calculated risks that are in line with his or her overall investment goals. There are only four empirically supported ways to delve into the real estate market: actually build, buy an existing development, invest in some one else’s development, or buy into a Real Estate Investment Trust. All of these venues carry risk and reward, but they also have distinctive differences that set them apart from one another. The most lucrative would be to develop a property from square one, but these types of investments carry more risk and work. To develop a project from scratch enables investors to have more autonomy, which permits them to more openly express their creativity.

Buying an existing property requires investors to pay a premium for the property because the initial risk of failure has already been taken by another developer. To buy into another developer’s idea is also laden with risk as well as reward. Developers provide the insight, while investors, provide needed equity. This is for those who have multiple commas in their bank account but have little desire, other than making more money, to enter the real estate market. These people are usually professionals who are too involved with their own profession to spend the time that is necessary to nurture a project from its conception all the way through its evolution.

Whatever gateway is used, real estate offers an escape from the groupthink that often imprisons many conventional investors. There are many ways to enter the real estate market, but there is one prerequisite to all of these: personal fiscal responsibility. Before people can make their mark in this discipline, they must commit to personal finance reform. By this, it is said that potential developers must start somewhere, and that place is their own finances, in order to create adequate equity that can be invested without jeopardizing their future. A potential investor must search out the pivotal facets of his or her personal financial life and make an honest assessment of his or her susceptibility to a certain level of risk. Real estate must coincide with your long-term aspirations.

Developers therefore must incorporate the needs of the external environment in which they operate and preserve what little there is left by not misappropriating one of our most precious resources by releasing it to those who wish to impede sustainable development by promoting their delusions of grandeur. If not, the next major development will have to happen on Mars, and to be quite honest, the ambience there is not so bright.

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