They sound nice, but real estate investors may think that they are not so easy to come by. Those investors who do happen upon them find usually find themselves bogged down by the IRS’ strict stipulations surrounding them.
Tax credits are, in fact, tools set in place to help investors grow their portfolios and while they may seem complex, they are accessible to any investor willing to do a little extra leg work.
While nobody should be expected to know the entire IRS tax code, real estate investors should be aware of some very helpful tax credits that can be applied to their assets.
Its tax time again. Although filing taxes can be a tedious and frustrating time for many Americans, real estate investors fall into particularly complex categories. Knowing the structure of your property business can save time and money when it comes time to file.
Kevin Walsh, CPA is an expert on all things real estate when it comes to tax structures and filing. A founding member of Atrox Partners accounting services, Kevin has over 15 years experience specializing in real estate, providing consultant services for investment and brokerage firms. This episode, Kevin discusses the importance of structuring your property business to maximize your tax returns. Kevin also discusses big changes coming to foreign investing in U.S. real estate.
Real Estate Filing Structures:
Business of Real Estate
Realtors; Brokers; Industry Servicers
Most favorable tax structure
Applicable to small and large-scale investors
Subject to loss-limitations ($3000 max)
Capital Gains/Losses advantages and disadvantages
Fix-and-Flip deals; high frequency of deals
Gains taxed as ordinary gains; not offered Capital Gains/Losses filing structure
Tax Tips for Investors
Knowledge is Power – Planning for your taxes is imperative. It is best to consult an expert to ensure the proper tax structure
Documentation – Filers need to verify they are filing within the appropriate structure; provide proof of your property business
Preparation – Prepare for taxes early…know your filing structure…certain filing limitations begin at close of each tax year
Protecting Americans for Taxes Act, 2015 (PAFT)
Revisions to previous FIRPTA, outlining terms and stipulations for foreign real estate investors
2 Provisions: 10% sur-tax on foreign investors abolished; 5% allotment for foreign investors now increased to 10%
Poised to bring influx of foreign capital into U.S. markets
Many potential home buyers enter the housing market looking for something they can call “home”. Many look for a property based on personal aesthetics. However, these may not be the best indicators of a good investment property. Buying the ‘dream home’ may require a stringent, long-term financial requirement of the homeowner; one that may limit those who aspire to build an investment property portfolio. By purchasing a property for a primary residence not as long-term commitment but as a strategic investment decision, homeowners can take advantage of a provision in the IRS Tax Code that may enable them to acquire more investment property.
26 U.S. Code § 121 – Exclusion of gain from sale of principal residence
Sale of property exempt from gains tax if property was held as principal residence for a minimum of 2 out of 5 years of ownership
Single taxpayers entitled up to $250k exemption
Joint filing taxpayers entitled up to $500k exemption
Mandatory, 2-year residency need not be contiguous
Applicable to one sale every two years, no limit on how often this may be done by homeowner
Things to Know
Look for properties that are good investment decisions
Sect. 121 only applies to exemption from Capital Gains Tax, meaning only a property that is being sold for higher than original purchasing price
Sect. 121 may not be good for those looking to have children.
Money saved in exclusion from gains tax may be used to acquire new properties
Check with tax adviser or C.P.A. for eligibility; you may still be eligible for partial exemption
Sect. 1031 Exchange – enables investors to sell a property with capital gains and receive a deferral on gains tax if purchasing a new one
If property was acquired as a replacement property and converted to a primary residence, investor must live in property for 5 yrs before qualifying under Sect. 121