Real Estate Strategies Archives - Page 2 of 2 - Think Outside the Tax Box

Real Estate Strategies

By Peter J Reilly CPA

Passive Activity and Self-Employment Tax In Rentals – One Of These Definitions Is Not Like The Other

Somebody I consult for threw a kind of oddball fact pattern at me. Their client, “Terry,” owns a big house with many rooms in a kind of resort type area. Terry rents the rooms out on a short-term basis averaging three or four days and provides no other services. Between this and that, Terry ends up spending about 15 hours a week.

The big concern comes from Terry buying a cost segregation study, which will mean a big loss. Can Terry use the loss in the year incurred, or will it be suspended? And is the income subject to self-employment tax in the future? I thought the answers to those questions were the same, but we learned from the Chief Counsel’s Office, one of those things is not like the other.


When a 1031 Exchange May Not Actually Save On Tax

The 1031 Like-Kind Exchange (LKE) provides a great potential benefit to taxpayers who want to sell rental properties to purchase others in the United States. IRC § 1031 allows you to defer a taxable gain that would normally be taxed at the time of sale of a rental property. However, there are situations when a 1031 exchange may not be the best option for the taxpayer, and it could potentially dilute the tax savings when compared to a traditional sale or other gain minimization strategies. To take advantage of the tax deferral benefits of a 1031 exchange, you’ll need to follow a specific set of guidelines. Here, we will dive into the circumstances that you should review to determine if a 1031 exchange will be the best option in mitigating the taxes you owe.

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When a 1031 Exchange Should Be Used for Tax Savings

If you made money on your real estate investment, congratulations! You’re now in the same club that more than 90 percent of the world’s millionaires do to create wealth. Now it’s time for tax on that profit. A large tax bill generally means you made a large profit. But avoiding the tax can be like having your cake and eating it too. A 1031 Exchange is an incredibly powerful tool for you to defer the tax when used in the right circumstances. Many real estate investors and landlords look to the 1031 Like-Kind Exchange (LKE) as an excellent method of selling investment real estate without paying tax at the time of sale. This gives you more use of the cash you get at the sale and more time to use it.

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Will Changes to Qualified Improvement Property Get Me a Refund?

Question: I’m familiar with Qualified Improvement Property (QIP) and the technical correction made in 2020. What is everyone doing for returns when, if corrected, the client could benefit? Is it something you can amend the 2018 tax return for if you took a 179 expense instead of a bonus?

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Reduce Taxable Income Up to $25,000 with Passive Rental Losses

You have likely heard that owning rental real estate provides great tax benefits. This is true for a multitude of reasons, but there’s one benefit that is arguably the best of the bunch: The Small Taxpayer Allowance for Deducting Passive Rental Losses. Based on average household income levels, more than three-quarters of taxpayers can potentially qualify for this fantastic tax benefit that offers taxable income reduction of up to $25,000.

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