Real estate professionals (both agents and investors) require a CPA with special knowledge of the unique tax issues facing them. As such, there are a number of CPA services we can provide to help you lower your taxes, deduct expenses, and plan your financial future.
We can help with the following for personal residences and rental properties:
Personal Residences – Deductible Expenses
- Mortgage Interest
- Qualified Mortgage Insurance
- Real Estate Taxes
Rental Property – Deductible Expenses
- Report Income when the income is received
- Security Deposits are not included in income
- Rental expenses are deductible in the year paid
- Start deducting rental income whether or not there is a tenant
- Do not deduct uncollected rent.
(cost segregation studies are great way to save tax dollars here.)
Real Estate Professionals – Deductible Expenses
- Professional Fees
- Educational Materials
- Business Travel Expenses
- Business Entertainment
For real estate agents, a lot of money goes towards advertising and commuting which also means a significant amount of time accounting. This is one facet where a bookkeeper can help ensure you’re tracking all your eligible deductions.
Similarly, a CPA firm can provide guidance on the entity selection that suits your line of work. Our experienced CPAs can help determine the best entity selection for you. For instance, real estate agents (in most cases) benefit from being an S Corporation while real estate brokers may be better suited to operating as a corporation (LLP or LLC) as opposed to being independent contractors (aka sole proprietors).
For Personal Residence Ownership
For your personal residence, there are several deductible expenses, but it’s important to consider the intricacies. For starters:
Mortgage Interest Deductions
Mortgage interest is one of the most misunderstood “tax breaks” as it has changed drastically due to the Tax Cuts and Jobs Act (TCJA). Now, many individuals and investors go into home ownership assuming they’ll receive a hefty break, but that’s not always (nor automatically) true. In the past, almost half the homeowners didn’t qualify for the deduction at all.
In order to qualify for the mortgage interest deduction at all, you need to itemize expenses, and those expenses need to exceed the standard deduction. If it doesn’t, then you don’t qualify. To put some numbers behind this to provide better context. In 2017, a standard deduction for a married couple was $12,700; in 2018, that’s almost doubled to $24,000. As a result, that couple in 2017 could potentially deduct $11,300, but in 2018 they no longer qualify.
There are two types of points deductions you can use: origination and discount points. The former is tied to the income of the loan originator while the latter is a type of prepaid interest. You can qualify for them by filling out Schedule A of Form 1040.
A point is equal to 1% of your total home loan and the IRS will allow you to deduct the full amount of your points in the year that you pay them. Of course, there is an upper limit to this as well, especially after the TCJA. In 2018, the mortgage interest on the total principal loan has been reduced to $750,000 (down from $1m). For those that are married, but filing separately, the new principal limit is $375,000.
For people whose loans started prior to 2018 however, they are grandfathered into the old limits.
If you’re trying to save money, work with a CPA year-round to help tally up expenses to help you qualify.
For Rental Property Ownership
There’s rarely a better investment than property, and nowhere is this more true than a rental property. However, every year, many landlords fail to take advantage of the tax deductions available to them. For instance, here are a few of the savings you can utilize if you own a rental property.
Improvements Vs Repairs Deductions
This is one that many real estate professionals get hung up on especially since there’s not a definitive list. In general, you can deduct repairs in the year you made them, but for improvements, keep track as you can either depreciate these expenses over time or make deductions the year you sell your home. For instance, a repair might be gutter replacement but an improvement might be adding an additional water heater.
The line between the two is not always certain, but consider the following chart to help understand some of the differences.
|Fixing Floors||New Roof|
|Fixing Leaks||New Plumbing|
|Replacing Broken Windows||New Carpet|
This one is especially important for real estate agents and landlords. Deduct your travel expenses. Keep track of the miles you drive and the gas you pump. If you own a vacation rental, you can also deduct travel expenses such as airfare and hotel fees for reasonable and necessary trips to inspect your property. These latter two need to be backed up by documentation which is all the more reason to work with a CPA.
In addition to travel though, your vehicle can also qualify as a deduction. If you purchase a vehicle for work, it’s possible to deduct repairs, general maintenance, and even the vehicle purchase so long as it is a reasonable and necessary vehicle for managing your rental property activity.
Some additional key takeaways to keep in mind:
- Report income when the income is received.
- Security deposits are not included in income.
- Rental expenses are deductible in the year paid.
- Start deducting rental expenses whether or not there is a tenant, so long as it is available and offered for rent.
- Do not deduct uncollected rent.
House Flipping Notes
With regards to house flipping, a myriad of these deductions apply as well, but also how you report your income is crucial to ensuring the largest tax savings.
- Can be taxes as either ordinary income or capital gain income
- Ordinary treatment is ideal when you have losses
- Capital Gain treatment is ideal when you have gains
If you’d like a bit more guidance, give us a call at 1-425-483-6600 or send us an email at firstname.lastname@example.org and we’ll address your specific concerns, and help you establish a tax plan that works for you.
And if you’re a millennial looking into income properties, check out some of our tax tips on RedFin.