They say nothing is certain in life other than life, death and taxes. As a CRE professional you certainly aren’t exempt from the age-old axiom. Taxes can be a complicated and expensive endeavor and most of us approach tax season every year with a certain sense of dread. CRE certainly has its own particular tax considerations but with a little knowledge and a pinch of planning you can approach tax season armed with the tools you need to keep more of your heard earned money in your pocket where it belongs.
Depreciation is a Good Thing
When you hear the word depreciation most people’s initial reaction isn’t to clap your hands with glee and do a jig. But as a CRE professional, you can think of depreciation as a good thing. When you’re in the CRE business your property is an asset that can be depreciated over a 39 year period. This is considered the useful life of your asset and as it deteriorates, you can deduct the decrease. While the nuances can get a bit complicated and requires a small amount of math to figure out your basis, the yearly allotment for your property’s depreciation can be deducted from your tax bill, equating to big savings when it comes time to write a check.
Maintain, Repair and Save those Receipts
Most people know that certain costs of doing business are tax deductible. For CRE professionals, property is your business and the cost of maintenance and upkeep on that property can cut into what you shell out to Uncle Sam every year. Maintenance and upkeep, whether paid directly or through a property management company, are typically deductible expenses. Insurance, legal fees and even property taxes aren’t deductible on personal residences but they count when it comes to your CRE portfolio. Remember to track your expenses and hold onto your receipts for a big savings on your annual tax bill.
Don’t Forget Your Personal Exemptions
It isn’t just your assets and property that matter when it comes to tax savings. How you spend your time and whether or not CRE is a full-time affair can also directly impact your bottom line. This nuance has to do with the IRS’ classification of pretty much all rental income as passive, which subjects that income to higher tax rates.
The exception to this rule comes in when you qualify as a Real Estate Professional, a phrase deserving of capitalization due to the importance given to it by our friends in the Federal Government. The reasoning behind the exception is that if you devote all, or a majority, of your time to real estate activities, the rental revenues you generate are no longer passive. According to the IRS, if you are actually working for your money you deserve to keep a little more of it.
In addition to being classified as a Real Estate Professional, there are a host of other expenses you should consider keeping track of. Advertising, vehicle mileage and in some cases transportation and meals may be deductible. While this certainly hasn’t been an exhaustive list, the tax benefits to CRE professionals can be incredibly rewarding. For specific questions speak with a qualified tax professional about whether your CRE portfolio is getting you the best tax treatment this year.