Rental Real Estate Property Owners

New Real Estate Treasury Regs for 2014 which can apply to prior years also - The IRS has new Taxpayer Friendly rules to write off repairs, IF you make the proper elections.    Doug's clients have been saving taxes with these rules already, using the former "temporary regs" and the way we already recorded "units of property".  You can be saving money too.

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In MORE Good News, from January 1, 2012 to December 2013 there is a "Special Bonus Depreciation" to deduct 50% immediately of specific types of additions, generally being new appliances and carpeting and some land improvements. This does not apply to total remodels.  So don't get confused.

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House Flippers - Have you made a Tax Election to use the "Simplified Production Method" of accounting for your flip properties?  Please ask your tax preparer about the advantages this offers.

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Attention Landlords!  Deducting losses from real estate rentals are in some's opinions now tougher due to a recent Tax Court ruling that the IRS had pushed for.  Some tax preparers were not aware of the old Temporary Treasury Regulation regarding realtors and their deductible rental losses.  Please make sure your CPA knows about this!
 
This may or may not affect your specific situation.  At the least some Realtor/Landlords need to keep time-logs on their rental activities, and some should make a Special Tax Election to protect themselves on audit.
 
Audits are not fun.  They are time consuming and expensive.  "Real estate professionals" should be able to deduct all of their rental losses if they "Materially Participate" in their rental activities. Either for each property or for all their rentals combined. This will vary by each person's circumstances. The Tax Code on rental properties are especially complex.  Please make sure you are following and documenting the rules to receive the full tax benefits your real estate has to offer.
 
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More News for Landlords.  The requirement to treat Landlords as a trade-or-business for 1099 reporting starting in 2011 was PARTLY REPEALED for some, UNLESS you have a business that files 1099's anyway.  So realtors with rental properties still have to include the 1099s for their rental property vendors.  There is a new question on your 2011 tax return asking you to verify this.   There is an inexpensive service at www.wagefiling.com.  I suggest using a Federal Tax ID Number, not your Social Security Number, when preparing 1099 forms.
 
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Tax  Strategy -  This strategy can have excellent benefits for some, and for some people this will also have an additional "tax synergy" benefit when the accelerated deductions create even more tax savings by how it works with other parts of your tax return, for others less so. Each person's situation is different so please consult with your CPA for your specific circumstances.

 

Rental property owners can often save an additional $300-$1,000 in income taxes per year, per house, if you use a Qualified Cost Segregation Study. A QCSS increases the deductible depreciation expense as in the example below.

 
 
 
It works by increasing the annual write-off  for components such as driveways, sidewalks, fencing, some landscaping and trees, HVAC water heater and roof (not accelerated but for later deduction if abandonded and replaced) , certain flooring, wall and window coverings, some cabinetry, appliances, and fixtures bought with the house.
 
 
 
A Qualified Cost Segregation Study prepared by Doug Tidwell, CPA costs $650 per unit that will hopefully be recouped immediately. There are even more savings when a component, such as an air conditioner, has to be replaced, as seen in the 2nd example. If your tax preparer hasn’t suggested using, or is not qualified to prepare, a QCSS, please call Doug Tidwell, CPA, at the number below.
 
 
 
Note: I have seen preparers do this with less than optimal results (including lost tax savings).  Please ask for their qualifications.  Three things the IRS can reverse your accelerated depreciation and write-offs for are: 1) if the preparer isn't "qualified"-construction and tax experience, 2) if the study uses "guesstimates"-not using Marshall Valuations or similar service, or 3) if the report is not "properly documented"-photos, assumptions & qualifications.  (Quotations are from the IRS Audit Manual for Cost Segregation Studies).
 
 
 
 
Sample Tax Savings
 Utilizing a Cost Segregation Study
 
 
                                        Without               With
 
Rental Income         $15,000                same
 
Interest Expense       (5,000)                same
 
Property Tax             (4,000)                same 
 
Repairs                        (500)                same 
                                        ________          _______
Net Cash Flow            5,500                5,500
                                        ________          _______
Depreciation Exp.       3,000                5,000
 
Taxable Income          2,500                   500
 
Tax at 30%                    750                   150   
 
Tax Savings = $600 per Property/Per Year
 
  
The savings are even greater in years when you have to replace an item that has a useful life of over a year, such as carpeting or an AC unit, or perform a rehab. For rental property such purchases cannot be expensed in the year of purchase. You have to depreciate it over its prescribed life. An air conditioner is a 27.5 year asset per the Tax Code. The deduction is about $145 per year. But if you had the old AC unit Segregated, you can write off that old unit as “abandoned”.  You therefore get a current deduction, whereas before you couldn’t. 
 
More benefits when you have a major repair, ex: air conditioner, roof, flooring, rehab
 
Using the same example as before:
 
 
                                    Without CSS     With CSS
 
Capital Repairs              (4,000)                 (4,000)
 
New net cash flow           1,500                   1,500
 
Writeoff old asset                  0                   (2,500)
 
Taxable Income               2,500  <------->    (2,000)
 
Tax Cost (Benefit)              750                     (600)    
 
Tax Savings = $1,350 Per Property in the year of repair
 
 
Note: As with most all tax strategies there are pros and cons. Cost Segregation Studies are not for everyone's situation.  Please consult with a tax advisor before applying this to your specific tax situation.
 
With years of construction and rental/rehab and tax experience, I would like to help you avoid some common and costly errors, such as flipping properties with 1031 exchanges (call for more info on a Tax Dealer v.s. a Tax Investor), using un-qualified cost segregation studies, and helping you to be very careful when using IRA money to buy real estate.  I inform you of the positive and negative sides of various tax positions and strategies.  Every tax savings plan involves certain tasks to implement or affects other business aspects and costs. There are very few "magic bullets", and Real Estate Investing can be extremely tax advantaged.
 
We will strive to provide you better service
 at fees that are hopefully less than what you are currently paying or will save.
 
 
 
DOUG TIDWELL, CPA (512) 656-0111
 
 

 

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