No one wants an April surprise when they file their taxes, discovering that they owe a lot more than they expected (and a lot more than they are able to pay). This is especially true for real estate investors, who are often making large investments and closing big transactions with tax implications.
How can you be confident and relaxed when tax season rolls around? By being prepared.
Make sure you’re ready for tax season by following these 5 tips:
Do These Things BEFORE the New Year
As the year draws to a close, there are certain things you should do to lower your tax obligation the following April. For example, arrange for maintenance and repairs late in the year, as anything that you pay contractors immediately becomes tax deductible.
The same holds true for investors who need materials to rehab properties. If you’re planning to redo flooring, replace appliances or build a fence, buy your materials late in the year so that they are tax deductible — even if you won’t do the work until the following year.
What other payments and investments should be made before the end of the year? Any property inspections related to a flip should be conducted before the end of the year. Also, pay your HOA dues before the end of the year, too, as they further draw down your tax obligation.
Do These Things AFTER the New Year
After you focus expenses at the end of the year, wait on revenue generators until January or later. For example, you can delay the deposit of rent payments until Jan. 1 so that you suppress your revenue for the previous year, thereby suppressing your tax obligation, too.
If you flip houses, it may be pivotal to wait until the New Year to close a transaction. The Internal Revenue Service (IRS) looks at flipping a house differently than most real estate transactions. The short-term gains related to flipping a house in a year or less are treated as ordinary income to be taxed at marginal rates. The long-term gains related to selling a house after owning it for a year or more are treated as capital gains, which are taxed at lower rates.
Become a Qualified Real Estate Professional
The IRS typically views real estate investing as a “passive” rather than “non-passive” activity. The trouble with passive activities as that you can’t use passive losses to offset income in other areas. For example, if you lose $5,000 on a real estate investment in one year, those losses are considered passive and cannot be used to offset your other income.
There’s one workaround for real estate investors: become a “qualified” real estate professional. If you spend more than half your personal services time on real estate activities, and if you spend more than 750 hours a year on real estate activities, you can qualify. Once you’re a qualified real estate professional, your passive losses can be used to offset income in other areas.
The year has come to a close. You’ve incurred the right expenses before the end of the year, and you’ve saved the right revenue generators for after the New Year. Now it’s time to get organized.
Collect any and all documents related to real estate expenses and revenue. This may include closing statements for any properties bought, sold or refinanced, as well as rent payment records, invoices from contractors, etc.
Getting organized is helpful as you work on your taxes (or as you work with a professional on your taxes), and thorough documentation is also essential if and when you get audited in the future.
Secure Expert Help
Filing taxes is always complicated, especially in a year when the tax codes and laws have changed dramatically. Don’t be reluctant to find a tax professional that understands the real estate investment businesses.
An accountant who focuses on real estate businesses will be able to minimize your tax obligation under the law, and a good accountant often provides more than enough value to validate the expense of using a professional.
Consider Outsourcing Your Real Estate Management, Too
The obligations and demands of real estate can feel relentless at times. There’s so much to think about, and there’s so much to do — and then tax season rolls around, and it all feels overwhelming.
Just like you can outsource your taxes to an accountant, you can also find a quality DFW property management company to make your life easier. At HUNTAHOME, we are the leading provider of property management in Dallas and Fort Worth. We can take on specific tasks like background checks, repairs and maintenance, or we can provide comprehensive DFW property management services.
Get in touch to learn more about our property management in Fort Worth and Dallas.