Real Estate Headlines That Didn’t Make The News, Part One: General Tax
Originally published on February 11, 2014
Updated on October 31st, 2023
As a real estate professional your focus is on several areas: researching markets, finding opportunities, closing deals, maximizing the return on current investments. The list continues. While doing what you do best you can also identify ways to generate savings. In a three-part series, focused on general tax, pass-through situations, and estate and gift taxes, we highlight ten ways that real estate professionals, as well as casual investors, can save. Following is Part One.
In Part One we examine ways to generate savings for tax liabilities by uncovering avenues to group income activities which help reduce the impact of the 3.8% Medicare Surtax, unravel common missed deductions on your next tax bill, and explore agricultural classification as a means to save on property taxes.
Affordable Healthcare Never Cost So Much
One of the components of Obamacare that has come into effect in 2013 is the 3.8% Medicare Surtax on net investment income. The surtax applies to passive income above certain thresholds including rental income. For a real estate professional, it may be possible to consider rental income as active rather than passive, which may not be subject to the additional surtax. Additionally, through grouping elections, other self-rental activities can be considered non-passive even for non-real estate professionals.
Developers Go Green By Planting Trees
If you have a development that is on hold or land that is held for speculation, it is possible to conduct a commercial agriculture operation – such as timber – on the property and obtain an agricultural classification for property tax purposes. There are a lot of I’s to dot and t’s to cross, but this can result in substantial property tax savings.
1099’s Flood The Streets
Over the past year, the IRS has cracked down on the issuance of 1099’s. So much so that there is now a question on the tax returns – were you required to file any 1099’s? and if so, did you? This has caused taxpayers and tax preparers to have an increased sense of awareness of their 1099 filing responsibilities.
Real Estate Broker Is Unhappy With His Tax Bill
Not many people would say they are happy with their tax bill, but there are several commonly missed deductions you do not want to miss. These tax bill deductions include cell phone expenses, business mileage, and the home office deduction.
A Huge Loss Creates Substantial Income
Perhaps the number one tax issue facing real estate today is cancellation of debt income on a foreclosure or short sale. It is important to know that the results can vary widely depending on whether the debt is recourse or non-recourse and the use of property, whether it was land held for investment, commercial real estate, a development, or even your personal residence. If you are considering this option, make sure to consult your tax advisor on the front end so there are no surprises at the end.
Man Refinanced His Mortgage & Fired His Accountant
His accountant probably did not tell him that when a partnership refinances to certain types of non-recourse loans it can cause future losses to be non-deductible or even cause phantom income. Mortgages from banks are fine, however, if you are refinancing to any non-traditional type of non-recourse loan, it is a good idea to contact your tax advisor on the front end to ensure that you have sufficient basis in the partnership interest or the loan qualifies as being at-risk.
Tax Election Brings Businesses Closer Together
All business activities are classified as either passive or active. Losses from passive activities are only deductible to the extent that there is income from other passive activities. Active losses, however, are deductible in full. It is possible to group two or more activities together for consideration whether the combined activity is active or passive. This allows some activities to be considered active which would otherwise be passive.
Engineers Storm Local Shopping Center
They were probably performing a cost segregation study. Ordinarily, when you purchase a piece of commercial real estate, the building will be depreciated over 39 years. However, with a cost segregation study some components of the building can be broken down into five-, seven- or fifteen-year lives. This results in a substantial increase in depreciation in the early years of owning the property. Even if you bought the property a few years ago, it is not too late to perform a study and depreciation can be “caught up”.
Gift Now, Save Cash Later
What is your business worth? As a result of lower fair market values, many real estate professionals are considering gifting as a desirable option for discounts and savings on taxes. Knowing how much your business is worth can help you make appropriate gifting decisions.
If you have real estate that is held in a Limited Liability Company or a Family Limited Partnership, a business valuation can be performed and substantial discounts can be taken for lack of marketability and non-controlling interests. With proper planning your gross estate can be reduced and estate taxes can be saved when you ultimately pass.
Goin’ Down For A Dirtnap Causes A Rise In Basis
Are you purchasing partnership interests or receiving a partnership interest through an estate? When you have a sale of a partnership interest or the death of a partner, the partnership has the option of making a Section 754 Election which steps up the basis in new partner’s share of assets to their fair market value. This gives the new partner additional depreciation deductions, which they otherwise would not have received.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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