A Real Estate Investor must chose an investor classification from three allowable classes. Each class provides certain benefits and requirements that should be considered when determining the best tax strategy.
One of the often cited benefits for investing in real estate is the tax treatment. Investors are able to expense, interest payments, operating expenses, capital improvements and depreciation.
Depreciation is an accounting expense that is realized when filing and paying income taxes. Expenses lower the taxable income, benefiting the real estate investor taxpayer with a lower tax obligation.
Passive: This is the least beneficial. Allows the investor to take real estate losses and depreciation to the extent of the income generated from real estate.
Active: An investor who materially participates in the investments and owns at least 10% of the investment, can count upto an additional $25,000 of losses against ordinary income. Additional losses for real estate investors phase out when the adjusted gross income breaches $150,000 for a married couple filing jointly.
Professional: This is the most advantageous for tax purposes. To qualify, the real estate investor must spend the majority of their time in real estate, and a minimum of 750 hours per year. The professional classification allows the investor to expense all of their real estate expenses for the year.
The ability to count expenses against income should not be the sole reason for choosing a classification. In all three cases, unrecognized losses can be carried forward and used against future gains realized when the property is sold.
Additional considerations include whether or not to create an LLC or S Corp. The difference will determine if income is subject to self employment tax or a distribution.
In all cases, real estate investors should seek counsel of a tax professional to determine the best option to meet their goals.
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Patrick Camuso, CPA
Camuso CPA PLLC
Real Estate is segmented into asset classes; single family, multifamily, office, retail, warehouse, etc. One overlooked asset class with big returns is Mobile Home Parks.
Kevin Bupp is an experienced real estate investor who survived the crash, and has since devoted all of his efforts into buying and operating mobile home parks with great cash flow.
Consider the following reasons and you will see why mobile home parks make sense:
Mobile home parks are more plentiful in the rural parts of the United States. In these tertiary and rural market, people are accustomed to regularly drive thirty minutes for their work commute and shopping.
Pride of ownership can be provided to people who otherwise are unable to purchase their home.
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What is a Delaware Statutory Trust?
Download a summary Delaware Statutory Trust FREE
Real estate investors focus so much time and effort on getting into the deal. Once they have a deal, it's all about creating cash flow, net operating income, and profit at a future sale.
For the investor who has held a property for twenty years and depreciated it to near zero, a conversation with your accountant can be shocking when you realize the potential tax consequence of selling.
If this is you, the depreciation recapture and capital gains tax can leave you feeling trapped and asking yourself, “How can I keep my profits?”
Most real estate investors have heard of the 1031 Exchange. In its simplest terms, the 1031 Exchange allows you to defer paying taxes from the sale of an investment property if you abide by the 1031 Exchange requirements including:
Tenant in Common or Delaware Statutory Trust.
In order to invest with other investors, you must choose one of two structure options to preserve the 1031 exchange.
The Tenant in Common notable limitations include:
The Delaware Statutory Trust characteristics / requirements for Investors:
Typical Delaware Statutory Trust Risk Profile
DST eligible properties will controlled by the sponsor/ operator, stabilized and provide consistent income. Financing will be in place. The property will be a Class A asset that is newer, larger, and located in a major metro area.
The investors considering a DST looks more at risk avoidance and principal preservation, than appreciation.
If your goal is to preserve your principal, gain consistent income, and get into a larger, newer, stabilized asset, a Delaware Statutory Trust might be the answer.
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Call Drew: (512)827-3654
*Realized 1031 is not an Investment Adviser or CPA and does not provide investment or tax advice. Any information presented in the podcast or other materials is for illustrative purposes only. Securities offered through the Realized Marketplace are exclusively through WealthForge Securities, LLC, a registered broker/dealer and member of FINRA/SIPC (“WealthForge”). Certain members of Realized are registered representatives of WealthForge.
Investing in real estate for passive income in retirement may seem risky to investors who would rather trust their retirement funds to fund managers and mutual funds.
Bill Manassero, host of the popular Old Dawgs REI Network Podcast, found that there are at least seven reasons for seniors to invest in real estate.
Bill started investing in real estate after he turned sixty. As veteran stock market investor, the decision to invest in real estate was easy, based on the opportunity to create passive income and preserve capital.
Once he got started, he realized he could accomplish a lot more with additional units. So, he set a goal to acquire 1000 units within six years to allow him the passive income he wanted and leave a legacy for his children, grandchildren and Haitian charity.
Before making your first real estate investment, Bill recommends taking four steps:
The most important question to ask before investing:
Experience is the most valuable teacher. Look to an experienced investor who can mentor you. Any investor with multiple properties and years experience investing can provide stories and lessons they learned the hard way, so you won’t have too.
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