Free 1031 Exchange Hotline: 877-471-1031

Notes from Leonard, Your 1031 Guy

Many of our clients have asked our opinion on what Congress will do to capital gains tax rates in the near term.  Our answer is always the same; expect it to go up.  California recently increased the state capital gains tax from 9.3% to 9.55% and the federal government is expected to increase capital gains tax rates from 15% to (at least) 20%.  Although the rate increases are certainly not welcomed, 20% is still low compared to previous capital gains tax rates (tax table).    

Of course, if you own real estate, why pay taxes at all?  Simply call my office and I'll explain how you can buy and sell real estate over an entire lifetime and never pay one cent to the tax man.  I'm always available at 877-471-1031 or via email.   

Tax Breaks You Don't Want to Forget About 

With tax season fast approaching and April 15th around the corner, we figured it would be appropriate to discuss the significant tax benefits that accompany real estate ownership.  Remember when filing your return to take full advantage of the following:

Mortgage Interest Expense
The government allows all of the interest associated with the financing of the property to be written off as an expense of owning the property.  For many real estate investors, especially those with interest only loans, this expense deduction can be substantial.

Depreciation
Depreciation is a method for matching the costs of acquiring property over the properties estimated economic life. The IRS now requires that most properties be depreciated using the straight-line method of depreciation (27.5 years for residential properties, 39 years for commercial properties).  Depreciation will act as an intangible expense and will shelter income from taxes.

Expense Deductions
Many of the costs associated with owning and managing a real estate investment, such as management fees and insurance premiums, are deductible.  One deductible expense worthy of note is the travel expense.  Many real estate investors acquire real estate in places they like to (or have to) visit, and each time they travel to the property, the travel costs are a deductible expense.  Not a bad deal if the property happens to be in Maui or around the corner from a relative.

Passive Losses
Due to depreciation and expense deductions, it is possible to own a property that is producing positive cash flow, but for tax purposes showing a loss.  These “passive losses” are subject to certain restrictions, but in many circumstances can be used to offset passive income from another investment.  In the event an investor qualifies as a "full time real estate professional" passive losses can be used to offset ordinary income.  Full time real estate agents should have no problem qualifying for maximum passive loss benefits (see recent US tax court opinion). 

The subject matter in this newsletter is intended as general information only and not intended as tax or legal advice.  Please always consult your tax or legal advisor for any specific tax or legal matters.