Medical Malpractice

Last month I received a ton of calls from you as the April tax filing deadline came and went. As a tax advisor and a real estate investor, I typically get a lot of tax questions, especially around April 15th. This month, I want to share the answers to YOUR Top 3 Frequently Asked Questions.

1) Should I set-up an LLC, Partnership, or Corporation? Unfortunately, the answer to this question is "IT DEPENDS"!! There are advisors out there who will answer on the spot and say "Always use LLCs for real estate". If you hear someone say this to you, run for the hills! Why? Because giving out tax advice without first understanding everything about the taxpayer is the same as a doctor prescribing medication without doing a diagnosis. In both the financial and medical field....this is known as malpractice. Here are some things you need to talk to your tax advisor about in planning for the correct legal entity for your property: 1) What type of property will you be purchasing (commercial, multifamily, single family, office space) 2) How long will you hold on to the property (long term, short term value play, etc.) 3) What is the expected annual income for the next several years 4) What is your exit strategy (sale, lease option, seller financing) and 5) What other types of income or investments are you involved in?

The answers to all of the questions above will assist your advisor in determining the optimal tax entity structure for your investment. It is true that an LLC can be a great entity for those investing in this. But there are times when operating your investments in an LLC will result in significantly higher taxes vs. in an S Corp or even a C Corporation. Again, this is not a one size fits all answer so be cautious of advisors who provide you with an answer on the spot. It's almost impossible to provide good advice without understanding everything there is to know about you and your investment plans.

2) Is there a tax benefit from the money I pay for educational seminars? This is a question that I received from a lot you who called into our office. The answer is DEFINITELY YES. Not only is money paid for educational seminars deductible on your tax return, but the related travel, lodging, and meal expenses may all be deductible expenses necessary to conduct your investing business. Some of you may have heard of a little pitfall when it comes to deducting certain expenses as "start-up" costs. Essentially, the IRS indicates that the expenses you incur prior to the start of your business (investing or otherwise), cannot be fully deducted immediately in the year it is incurred. Rather, it must be capitalized and amortized (similar to depreciation) over 15 years. The break that we get as taxpayers, is the first $5,000 of the "start-up expenses we incur can be deducted in full. So what if you spent $20,000 in educational expenses this year? Well, in order to take that deduction in full, you need to make sure you have "started" your investing business!! If you have spent the money in the classes, what are you waiting for? Get started on your investing business to not only save taxes but also to start making that monthly cash flow!

3) Do I need to get a realtor license to be a "real estate professional" and receive maximum tax benefits from my real estate? First let me briefly talk about the benefit of being a "real estate professional". Generally, for those who qualify as real estate professionals, the real estate tax losses, are unlimited each year and can potentially reduce your overall tax liability down to zero. Alternatively, for people who are not real estate professionals, the amount of tax losses you can take on your tax return may be limited each year.

So the answer to whether a license is needed is NO. This type of professional as defined by the IRS, actually has nothing to do with whether you are a licensed real estate agent or broker in your state. In other words, teachers can be real estate professionals, stay-at-home mom's can be real estate professionals, and accountants can be real estate professionals. Basically, anyone can potentially be a real estate professional. It has nothing to do with your education, professional licenses that you hold, or what type of business you are in. Rather, the IRS determines real estate professional status based on a set of different criteria such as the type of activity you are doing in real estate and the amount of time spent on those activities during the year. So that leaves a lot of room for planning. Again, a realtor's license is not needed to qualify for this benefit.

As you know with regards to real estate investing, it isn't enough just to study about investing. It is in the application of what you learn that puts you on your way to creating the lifestyle you are looking for. This is the same with regards to tax planning as well. The value is in the implementation. A tax saving strategy is only as powerful as your willingness to implement it. As you progress with your investing plans, make sure you implement your tax saving plans as well to keep more of your profit and not overpay the IRS. Happy Investing!

Copyright © 2010 by Amanda Y. Han, CPA

KEYSTONE CPA, INC.

Maximizing Profits & Increasing Wealth

www.keystonecpa.com

*We welcome suggestions for future topics that you would like to hear about tax saving strategies relating to real estate investing. So please email your suggestions to me directly at ahan@keystonecpa.com.