Real Estate CPA – Investments, Investors, Professionals and Construction

Passive, Non Passive, and Active

Passive losses can only offset passive income, which is problematic for new real estate investors. As your real estate empire builds, you will generate more significant income on your older investments allowing you to offset passive losses on your newer investments. For new investors, however, their investments may be cash flow positive but show a paper loss because of depreciation and other real estate-specific rules, resulting in losses that build up until the property is sold. If your portfolio includes short term rentals, you may be able to offset income more directly with special IRS rules. In addition to understanding how to account for passive, non-passive, and active income, we can work with you to structure your businesses to minimize this problem. As a real estate CPA firm, we can help you with a strategy to move losses into the non-passive category; we can help you lower your taxes today, but only if we are involved early in the process to help you set up the vehicles properly.

Account and Tax Effects

Those engaged in fixing and flipping may find themselves with excessive short-term capital gains, the inability to write off what seems like obviously business-related expenses, and failure to account for costs properly may result in losing valuable deductions. If you fail to deduct your expenses, you may reduce your profitability drastically by an artificial tax sword against your business instead of the tax shields for which real estate investing is known. Engaging an accounting firm specializing in real estate investment and construction issues will help you set up your chart of accounts and tax systems correctly from the beginning, avoiding these pitfalls.

Section 1031 “Like-Kind Exchanges” helps defer taxes – a huge advantage for real estate. The rules were adjusted in the Tax Cuts and Jobs Act.

Real Estate Income can be Tax-Free

Most of the tax code that impacts individuals is based on cash accounting, meaning the dollars that go in and out of your account this year. Real estate is unique because of the high leverage available for investors, write-offs related to mortgage interest, and the ability to depreciate the asset during the time of ownership. By properly aligning your business setup, we attempt to pair your passive losses against your passive rental income, letting you collect tax-free income for life. That tax shield is reclaimed by the government when you sell the asset. However, if the ownership is structured correctly, much of that tax shielding can be rolled forward throughout your life, mainly disappearing in your estate and never being repaid. This also may apply to foreign real estate investors, but planning and record keeping should keep FIRPTA compliance in mind.

While these structures will eventually involve your tax attorney and estate attorney, we can help you set up your initial structures to generate that tax-free income and preserve the shield until you are ready to meet with your legal team.

In the Eyes of the IRS

If you expect to have passive losses over passive income, you will find yourself with an excessive tax bill at this time. It will be cold comfort to you that in 30 years, you’ll reclaim that when you are writing an extensive check to the IRS. If you need to convert the losses to active or non-passive status, we can work with you to structure your business operations to make the right income functional. The designation of Real Estate Professional is a specific IRS designation and may or may not correspond to what you think of your professional. It may not be possible to convert all your losses into active or non-passive losses, but the more the losses that can be offset against other income, the smaller your tax bill is today.

More Info: What is Passive Activity Income?

Advantages of having Expert Advice

As you buy and sell real estate or rent it out as a landlord, a knowledgeable real estate CPA can help you minimize your tax burden by maximizing the deferrals, deductions, and other ways that the tax code favors the real estate industry. You need to do things correctly during the tax year; you can’t necessarily fix things when you go to file, so make sure you check in with your real estate firm’s CPA as you conduct business, not just at tax time.