Real Estate CPA – Investments, Investors, Professionals and Construction

Passive, Non Passive, and Active

Passive losses can only be used to offset passive income, which can pose challenges for new real estate investors. As your real estate investments expand, the income generated from your earlier ventures can help offset passive losses incurred in newer investments. For novice investors, however, their properties may yield positive cash flow but show paper losses due to factors like depreciation and other real estate-specific rules. These losses can accumulate over time until the property is eventually sold.

If your portfolio includes short-term rentals, you might have opportunities to more directly offset income through specific IRS regulations. Beyond comprehending the accounting aspects of passive, non-passive, and active income, we can collaborate with you to structure your businesses in ways that mitigate this challenge. As a real estate CPA firm, we can assist you in devising strategies to reclassify losses into the non-passive category, effectively reducing your tax liability. However, this can only be achieved if we are engaged early in the process to ensure your business vehicles are established correctly.

Account and Tax Effects

Individuals involved in property fixing and flipping may encounter challenges related to excessive short-term capital gains, difficulties in claiming seemingly clear-cut business-related expenses, and the risk of mishandling cost considerations that could lead to the loss of valuable deductions. Neglecting expense deductions can significantly reduce your profitability, turning what should be tax benefits for real estate investors into tax liabilities.

By engaging an accounting firm with expertise in real estate investment and construction matters, you can establish your chart of accounts and tax systems accurately right from the outset, steering clear of these potential pitfalls.

Furthermore, it’s worth noting that Section 1031, often referred to as ‘Like-Kind Exchanges,’ offers a valuable avenue for deferring taxes in the realm of real estate. It’s essential to be aware that the rules governing these exchanges were modified with the Tax Cuts and Jobs Act.

Real Estate Income Can Be Tax-Free

Much of the tax code for individuals is based on cash accounting, reflecting annual financial flows. Real estate, with its unique features like leverage, mortgage interest deductions, and depreciation, offers opportunities for strategic tax planning.

By setting up your business correctly, we aim to offset passive losses against passive rental income, allowing you to enjoy tax-free income for a significant period. While the government recovers some benefits when you sell, with the right ownership structure, much of this advantage can last a lifetime, gradually dissipating within your estate, without repayment.

This approach can also apply to foreign real estate investors, with attention to FIRPTA compliance through proper planning and record-keeping.

While eventually involving your tax attorney and estate attorney, we can help establish initial structures for tax-free income and safeguarding benefits until you’re ready to consult with your legal team.

In the Eyes of the IRS

Should you anticipate experiencing passive losses exceeding passive income, you may encounter a substantial tax liability in the present. It can be disheartening to know that it will take several decades before you can recoup these losses while writing substantial checks to the IRS.

If you find the need to transform these losses into active or non-passive status, we can collaborate with you to structure your business operations for optimal income treatment. It’s worth noting that achieving the designation of ‘Real Estate Professional‘ is a specific IRS recognition, which may not necessarily align with your perception of professional status. Converting all losses into active or non-passive losses might not always be feasible, but the more losses that can be offset against other income, the smaller your current tax liability becomes.

More Info: What is Passive Activity Income?

Advantages of Having Expert Advice

When engaging in real estate transactions, whether buying, selling, or leasing properties as a landlord, the guidance of a proficient real estate CPA can assist you in reducing your tax obligations by capitalizing on deferrals, deductions, and other tax advantages tailored to the real estate sector. It’s essential to ensure proper adherence to tax regulations throughout the year; adjustments may not always be possible at tax-filing time. Therefore, maintaining regular communication with your dedicated real estate CPA is crucial for sound financial management, not solely during tax season.