Law Articles And Legal Issues

Tax Traps For New Real Estate Investors

Perhaps one shouldn?t be surprised that new real estate investors fall into the same tax traps again and again. Real estate burdens investors?especially new investors?with some tricky tax accounting.
But just because some other newbie makes these mistakes, that doesn?t mean you need to. You just need to know where the traps are so you avoid them. And here are the biggest real estate tax traps you don?t want to fall into:

Tax Trap 1: Passive Loss Limitation

On paper at least, real estate often loses money. Even if the rent pays the mortgage and the operating expenses, the books still show a loss because you get to write off a portion of the purchase price through depreciation each year.

If a rental house that cost $275,000 breaks even on cash flow, for example, you might also get a $10,000 annual depreciation deduction. If your marginal tax rate is 28%, that depreciation should save you $2800 annually.

Sounds sweet, right? Well, it is?or should be. Except that the U.S. Congress labeled real estate investment a passive activity and said that, except in a couple of special circumstances, you can?t write off passive activity deductions unless overall you show positive passive income.

This passive loss limitation rule means that many real estate investors don?t get to use tax saving deductions from real estate?or least not annually.

Two loopholes, courtesy of Congress, do exist that let you write off deductions from real estate even if overall you show a loss from real estate investing. If you?re an active real estate investor with adjusted gross income below $100,000, you can write off up to $25,000 of passive losses annually. (If your income is between $100,000 and $150,000, you get to write off a percentage of the $25,000. Ask your tax advisor for the details.)

Here?s the second loophole: If you?re a real estate professional, Congress says the passive loss limitation rule doesn?t apply to you when it comes to real estate. A real estate professional, by the way, is not someone who?s licensed as an agent or broker. The law instead creates a time-based test: A real estate professional is someone who spends at least 750 hours a year and more than 50% of their time working as a real estate agent, broker, property manager or developer.

Tax Trap 2: Capitalization of Improvements

The next mistake that new real estate investors make? Thinking they can write off the amounts they spend to improve the property. Sometimes you can. Often you can?t.

Here?s why: Any expenditure that increases the life of the property or improves its utility needs to be depreciated over the next 27.5 years (if the property is residential) or over 39 years (if the property is nonresidential). You can?t, therefore, write off the money spent improving or renovating a house?except through depreciation.

I?ve seen new real estate investors in tears about this wrinkle. Some investor draws, say, $20,000 from his IRA or 401(k) to fix up some rental. He figures he?ll be able to write off the $20,000 as a tax deduction in the year improvements are made.

No way. Instead, he?ll have to write off the $20,000 at the rate of a few hundred bucks a year over the next three or four decades.

The trick with renovation?if you want to call it that?is to keep the property well maintained as you go. Repainting, new carpeting, general repairs?these items should all be all deductions in the year of expenditure (er, subject to the passive loss limitation rule discussed as the first tax trap.)

Tax Trap 3: Missing the Section 121 Exclusion

Here?s the final tear-jerker. And I see it several times a year. Someone decides that rather than sell their principal residence when they ?move up? to a larger new home, they?re going to turn the original home into a rental. This is a disastrous decision most of the time because of Section 121 of the Internal Revenue Code . Section 121 says that if you?ve owned a home and lived in a home for at least two of the last years, you won?t pay any tax on the first $250,000 of gain on the sale ($500,000 of gain in the case of someone who?s married and filing a joint return).

By converting a principal residence to a rental property, you turn tax-free gain into taxable gain if you don?t sell the property in the first three years.

Two quick notes about goofing up the Section 121 exclusion. If you don?t have appreciation in your old principal residence, you?re not losing any Section 121 benefit by converting to a rental.

Second, if you do have a lot of appreciation in your old principal residence and want to use that equity to acquire a rental property, consider this: Sell the old principal residence when you move out so the gain is excluded from taxable income. Then use the tax-free proceeds to purchase another rental?perhaps even the house next door.

California LLC formation expert Stephen L. Nelson CPA has written more than 150 books. Formerly an adjunct tax professor at Golden Gate University, Nelson taught the graduate tax class ?Choice of Entity: LLC vs S Corporation.? Nelsons is also the author of the bestselling book Quicken for Dummies, which sold more than 1,000,000 copies. Copyright 2006 by Stephen L. Nelson and http://www.llcsexplained.com

Other Article Sites

findabook.com  moneycd.info  a-mortgage.info   about-lemon-laws.info  aboutstudentloans.info
all-about-publishing.info  auctions-articles.info  bestcollege-university.com  bestispconnection.com
biblefolder.com  blogger-website.com  books-used.info  brokers-guide.info  buywindows.info  cable-dsl.info
career-miner.com  carpel-tunnel.info  cashinaflash.info  cashloanreviews.info  casinobell.com  chat-house.info
clearmycredit.info  collegeloantips.info  crones.info  depression-articles.info   dirnic.net  dishguides.info
divers-below.com  expodog.info   financewizz.com  fire-insurance.info  getgood.info  handleit.net   it-idea.info
health-supplies.info  hosting-right.com  insidealert.com  insurance-facts.info  jobs-employment.info
justgood.info  lookgold.net   lowcost-travel.info  money-source.info  myhostzone.info  numisblog.com
peoplesearchfinder.info  pr-articles.info  realeas.com   refinancing-guides.info  spyware-remove.info
telelot.info  the-law.info   toppaid.info  travel-deals.info  travelcorrect.com  wedding-guide-site.com
your-blog.info  your-credit.info

Other Law Sites
Search The Internet For Other Law Sites

Law Books
Search For Law Books At FindaBook.com

New York City Construction Accident Lawyers Lobby for Safer New York State Labor Laws
Recent construction accident news supports David Perecman and Doug Fanning's stance that New York State labor laws need to be updated and strengthened to protect worker's rights.

Legal Resource Local-Attorneys Expands to Include Divorce Law
Local legal resource website Local-Attorneys has announced that it is expanding to cater to divorce law specialists and visitors in need of advice. Web users will be able to browse local law firms who specialize in every sort of legal vertical. Find the best advice and attorneys in the industry.

Understanding The Law...Criminal Law
The following Q&A's have been provided to help you better understand Criminal Law.

Tax Attorney Web Site Warns of Upcoming Tax Laws in 2008
TaxAttorneyHelp.com, an online network of tax attorneys, is preparing to assist taxpayers with new laws in the coming year.

New Legal Guide to Divorce by Family Law Expert
A brand new legal guide to divorce, "Divorce and Separation Today", has been newly published by DragonCub. Far more useful than the average divorce guide, it delves into how the divorce courts operate as well as providing practical and sensible advice on emotional and other sensitive areas. It is an essential guide for anyone considering or going through divorce.

Lemon Law Attorney, Dana Lynn Tarquini, Featured at Lemon Law Administrators Conference
Ms. Tarquini, one of the country's most prominent lemon law attorneys, participated in panel discussion at the 10th anniversary lemon law administrators conference in Atlantic City.

Los Angeles Divorce Attorneys, The Family Law Company, Opens a New Office in Beverly Hills
Los Angeles family law attorney and founder of The Family Law Company Pamela Wright opens a new office in Beverly Hills. The Family Law Company offers high-quality legal services at affordable rates for divorce, paternity, child custody and child support actions because justice doesn't have to cost a fortune.

Kirsten Branigan Joins McDonald Law Group, LLC Adding Depth in Employment Law
Kirsten Branigan and Nancy McDonald join forces with a shared passion--advocating for advancement of women in the practice of law.

Fresno Family Law Attorney Says Collaborative Law Can Provide Smoother and More Affordable Divorce
Fresno family law attorney Erin Rhames-Childs says collaborative law can help people can reduce the conflict and cost of divorce litigation.

Elizabeth A. Kreitzer, Certified Family Law Specialist, Joins Klinedinst Family Law Group
The California-based law firm of Klinedinst PC has added Elizabeth A. Kreitzer, Certified Family Law Specialist, to its expanding Family Law practice group. Ms. Kreitzer's addition, combined with the strength of the firm's existing litigation teams, will help ensure that every client receives sophisticated, professional and compassionate representation, Ms. Kreitzer is the recipient of the Michael C. Shea Chair in 2005, and adds a wealth of family law knowledge to the department. She is experienced in working with sophisticated clients handle complex family law issues, including divorce, paternity and custody disputes, prenuptial agreements, adoption proceedings, and other family law matters.

CalBizCentral Announces Booklets to Help Businesses Navigate State, Federal Employment Laws, Reduce Legal Risk
CalChamber's CalBizCentral 'What Every Manager Needs to Know About' series provides training managers need to comply with confusing laws.

Copyright Infringement Cases Can Teach Us To Obey Copyright Laws
Copyright infringement cases can be both costly and time consuming. Considering copyright infringement is something that isn?t as easily defined as theft or speeding, there are numerous copyright infringement cases changing the way copyright law is viewed in the U.S. By reviewing a few of these copyright infringement cases, you can get a better idea of what is, and what is not, acceptable use of copyrighted works.

Houston Bankruptcy and Family Law Practice Announces Affiliation with Houston Civil Litigation, Business Law and Immigration Law Firm
Houston bankruptcy attorney Michael Busby of Busby & Associates joins forces with Carlos Peniche & Michael Rojas of Peniche and Rojas to offer Texans comprehensive legal services - from divorce, personal injury and civil litigation to contract disputes, employment law and immigration services.

Pending Federal Law Threatens All Copyright Owners says the Hodgson Law Group
The Shawn Bentley Orphan Works Act of 2008 (S. 2913) "Orphan Works Act of 2008" (H.R. 5889) allows anyone to use a copyrighted work without first obtaining permission. The user can later claim that a diligent search was conducted but the owner could not be found in any later action for infringement. This new legislation will apply to all copyright owners whether or not the work was previously registered with the Copyright Office. The legislation threatens the rights of artists, photographers, composers, film makers, publishers, and visual artists says the Hodgson Law Group. The Copyright Office not only endorses this legislation, but also advocates further changes that go beyond the proposed statute in reducing copyright protection. T...