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As the year 2019 approaches, we draw closer to deadlines for many tax deductions that are critical to real estate investors. One of the reasons for investing in real estate is not just for generating income but also to reap the tax benefits.
Flipping a home can be defined as buying a home, repairing and enhancing its appearance, or it can be wholesaling where one puts a home under contract and then "flips" the interest in a property to another investor.For Flippers, here are some things to keep in mind as we approach 2019...
The IRS is likely to treat flipping as a trade or business, and the properties you flip as inventory. Income from a trade or business is treated as ordinary income, and net profits get taxed at higher rate than max capital gains rate. Ordinary income can be offset by net operating losses. Keep in mind that self-employment income can't be netted against capital gains or losses.Try not to flip and close on a property right before 2019
Taxes cut into a large portion of your flip proceeds, so you might want to delay your closing until the new year. If your buyer insists on closing before end of year, it might be worth to pay some of your Buyer's closing costs.Buy your materials now if you're rehabbing a property
If you're planning to flip a property near the end of 2018, buy your materials now rather than in 2019 so that your expenses will be tax deductible for 2018.Try to do your repairs before the end of the year
Have your contractor perform the repairs now so you can take deductions for 2018. Repairs such as plumbing, electrical, heating or AC unit repairs may all be tax-deductible costs for Flippers.
Although this may be the case, the IRS may still consider some major "repairs" such as putting on a new roof, as improvements rather than repairs. As improvements, these may have to be depreciated over several years. This may apply more to Landlords than flippers but it's important you consult your tax advisor.Landlords must keep in mind the following tax tips as we move into 2019...
Consult your accountant before assuming a "repair" can be tax-deductible.
As a landlord, you have to depreciate some expenses over several years as "improvements" while others can be taken as a full deduction for the year in which the "repair" was performed.
The question becomes what qualifies as a "repair" versus a capital improvement?
It could go either way. The larger the repair, the more difficult this issue becomes. If you fix a leaky roof, and ultimately determine that it needs to be replaced...is that a repair or improvement?
Bottom line: Work closely with your tax advisor when deducting expenses.You might want to consider delaying your rent payments
Depending on what your tax situation looks like, you might want to defer some income to 2019. One way to do this is to have your tenant who pays at the first of the month delay the payment until Jan 1 of 2019. This way, the income goes on 2019 and not 2018.Consider paying HOA dues before 2019
If you're renting out property such as a townhome or condo, the HOA dues you pay are tax deductible. If these fees are due in Jan or Feb of 2019, consider paying them in 2018 to get the tax deduction.Understanding the difference between passive and active rental income
According to the IRS, rental income is either passive or active. The IRS considers most cases of rental income to be passive unless you're a qualified real estate professional. A qualified real estate professional is anyone that is actively involved in real estate more than 50% of the time and total more than 750 hours per year. Active income includes wages, business and investment income. Active and passive income is taxable.
It's important to know that you can't use passive losses (or income) to offset your losses (or income) from non-passive activities. For example, if you lose money on your rental real estate, you can't deduct the losses to reduce your wages or self-employment income.
If you or your spouse are "actively" involved in real estate transactions, you can deduct losses up to $25,000 from non-passive (like your wages) income. Active participation means you are involved in key management decisions such as approving tenants, setting rental terms or determining and approving appropriate capital expenditures.Document the time you spend on real estate activities
If you want to be considered as a real estate professional, make sure to document activities such as consulting with architects, contractors, site inspectors or interviewing potential tenants. It's best to document activities as they happen but you could also make a reasonable estimation of the hours you spent. Back your estimates up with appointment records, calendars and summaries.
Be a tax and money-smart real estate investor as we move towards 2019. Also make sure to always consult your Accountant or Tax Advisor on any of the issues mentioned in this article.
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