Tax Planning for Real Estate Investors
Real estate investors are usually grouped into three distinct categories: landlords, developers and dealers. Each category has its own tax nuances and therefore, completely different tax problems.
A landlord purchases real estate with the intention of renting the real estate to tenants. The Internal Revenue Service considers rental income from real estate to be passive income. The good news is passive income is not subject to self-employment tax that bad news is that losses that are created may be limited based on you adjusted gross income or by the amount of time you devote to the rental business annually. In addition, rental real estate is available for the lower capital gains tax rate when sold.
Developers have a different problem, for instance, if you purchase land for the purpose of developing a subdivision, your tax issues are completely different than that of a landlord. First your income now is classified as earned income subject to self-employment tax and your expenses may be allocated over the entire project and are deductable as the lots are sold.
Dealers are those investors who buy real estate, usually one building at a time, with the intention of immediately reselling the property for a profit, also a called a flip. Normally the dealer will make some improvements to the property before he resells it. The tax issues confronting dealers often center on how many properties they sell in the tax year. The IRS may determine that an investor should be classified as a dealer based on how many properties are sold in a given year and a dealer may be subject to self-employment tax.
As you can see, the real estate investor has a number of issues that need attention to reduce his income tax liabilities. The tax professionals at Tax Warrior know how to solve these problems.
