REI WEALTH MONTHLY Issue 31 - Page 27

TOP 5 MISTAKES THAT MAY BE COSTING YOU MONEY AMANDA HAN & MATTHEW MACFARLAND Now you can see what we mean when we say not all tax deductions are created equal. To ensure you maximize your tax savings, make sure that you are taking your tax deductions on the right forms and schedules! Mistake #2: Real Estate Professional Status As an investor, you probably already know about the wonderful tax benefits of depreciation. Depreciation is the ability to write off the purchase price of your rental properties over the life of the asset. However, if you are someone with higher income, it is possible that your rental expenses are not being used to the fullest extent to reduce taxes from your other non-rental income. One way around this hurdle is to become a “real estate professional” in the eyes of the IRS. Let’s go over an example of what this means. Lynne had been working with a CPA for many years and was under the false impression that she had been benefiting from the tax deductions as a real estate professional. Unfortunately several years after investing in real estate she found out that her CPA prepared her taxes incorrectly which resulted in lost refunds of $20,000. Lynn’s returns were prepared so that her excess rental losses were not fully utilized to offset the taxable income from her husband’s W-2 job. Instead of being deducted, those losses were trapped and could only be used to offset taxes from “future” rental income. This is by far the biggest mistake that we see time and time again made by real estate investors. This can be a costly mistake and one that may not be undone. So what exactly is a real estate professional and how could that have helped in Lynn’s situation? Contrary to popular belief, the Real Estate Professional Status is not taken by simply indicating that as your occupation on your tax return or even by filling out a specific form or checking a box. Being a real estate professional does not mean you need to be a licensed realtor or broker. It just means that you have to be actively involved in your rental real estate and you have to spend at least 750 hours in real estate per year. Lastly, to be a real estate professional in the eyes of the IRS, you must also spend more time in your real estate than your other job(s).