Real Estate

Real Estate is one of our specialties at Canvas Accounting Services. With all the subtle nuances specific to real estate, having a specialist in your corner provides a solid foundation to help build your portfolio.

Real Estate Professional Status

Real Estate Professional Status (REPS) enables you to offset your forms of active income with passive losses. As many investors are aware, it is possible to have positive cash flow while having little to no taxable income, and in some cases even show a tax loss. Losses can be increased further by accelerating depreciation through cost segregation.

Now you may be thinking why would I want to increase losses? The important detail to remember here is we're focusing on increasing tax losses, which is far different from "losing money". The goal is to use your rental losses to offset your (or your spouse's) non-rental income sources. But depending on your individual tax position, you may not be allowed to take those losses to offset your other types of income. This is because rental activities are considered passive in nature by default and thus trigger what's called the Passive Loss Limitations.

This is where REPS comes in. One of the exceptions to the Passive Loss Limitations on rental income is qualifying as a Real Estate Professional (§469(c)(7)(B)). If you qualify, you can use your current year's rental losses to offset your active income sources (typically W-2, K-1, or Schedule C income) as you want. This can be especially beneficial to married couples where one spouse is fully engaged in a real property trade or business while the other is earning active income. So imagine not paying taxes on your real estate income and even reducing your spouse's income taxes too! If you're single, don't worry. You can still deploy this strategy on your own.

Sound too good to be true? Not quite. But as is with most things in life, making (or in this case saving) money isn't always easy. There are numerous details and rules you must follow to achieve REPS status and working throughout the year with a knowledgeable Real Estate Tax Professional is critical. So if you have questions about how to qualify for Real Estate Professional Status, navigate to the contact page above to schedule a call.

Material Participation

Material Participation per the US Code is defined as the taxpayer involved in the operations of the activity on a basis which is regular, continuous, and substantial. Sounds a little vague right? Luckily, we can turn to the IRS Publication 925 which provides seven material participation tests. For the most part though, when considering rental activity, we primarily look to the following three tests:

You participated in the activity for more than 500 hours.
You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.

So why are these tests important to Real Estate Investors? Because in order to take any passive losses (i.e. rental activity) you have to either have other sources of passive income or be able to claim Material Participation in the activity. This is also crucial for qualifying for REPS mentioned above. Depending on your individual situation however, you may not need to qualify for REPS to utilize passive losses to offset other sources of income. But there are limitations based on your modified adjusted gross income.

If you have any questions about how you can Materially Participate in your rental activities to ensure you receive the most tax benefit from your investments, please navigate to the Contact page to schedule a call!

Short-Term Rentals (STRs)

Commonly referred to as Airbnb's or VRBO's, Short-Term Rentals provide interesting tax benefits. By maintaining an average stay of 7 days or less and materially participating in your STR, your tax losses can be re-characterized as non-passive. This means you can offset your W-2 and business income to reduce your tax liability and accelerate your portfolio growth by reinvesting into more properties faster.

STRs are covered by several specific sections of the tax code, such as Treasury Reg § 1.469-1T and § 1.469-5T. These code sections are often misinterpreted or left out from Tax Planners knowledge all together. If you're investing in STRs, make sure you're working with an expert.

Cost Segregation Studies

Fixed Assets are assets within a business that have a useful life of more than 1 year and also have future earning potential. The IRS codifies these types of assets with various class lives and requires taxpayers to capture deductions over time by spreading them out as depreciation over several years.

This concept is especially important to real estate investors because we are purchasing very large fixed assets. By default, real estate purchases are broken into two main categories: Residential and Non-Residential. These assets are depreciated over 27.5 years and 39 years, respectively. As you may be thinking, that is a very long time to receive deductions for such a large purchase.

This is where cost segregation studies come in. Cost segregation studies break out the components of a structure into asset classes with shorter useful lives, such as 5 and 15 year property. This information provides for higher deductions through faster depreciation. Further, you have the option to claim bonus depreciation on property that has a useful life of 20 years or less.

Understanding how these studies work and how they can benefit you, is a critical consideration for any real estate investor. Navigate to the Contact page to make an appointment and find out how this strategy can benefit your specific situation.

Page updated

Report abuse