Common Real Estate Tax Mistakes To Avoid

Whether you are a real estate maestro or a total beginner - the American tax code is the same, overly complex and unbridled with tricky criteria, rules, and nuances. Regardless of who you are, mistakes are common in the realm of real estate investing.

KEY TAKEAWAYS:

Investors should avoid making common mistakes such as not accounting for depreciation, inadequately allocating the value of the land, assuming all travel costs are deductible, thinking that an LLC (Limited Liability Company) is necessary to deduct business expenses, and not utilizing a 1031 exchange.
Planning is crucial to success in real estate investing, and tax planning is a critical component of that planning process.
Research is essential before purchasing any property to determine the worth and potential tax implications.
Overpaying for a property can have negative consequences on both cash flow and tax payments.

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In this article, we will discuss some common real estate tax mistakes that investors make repeatedly without fail. Whether you are a DIY investor or "hire the pro" investor, some common tax mistakes to avoid:

1. Neglecting To Create a Strategic Tax Plan

Planning is a critical first step in any business endeavor. Without a well-thought-out plan, achieving goals can be difficult if not impossible. Therefore, it is important to consider a range of factors when formulating a plan. Investment strategy plays a vital role in making sound investment decisions. By developing an effective investment strategy, investors can make informed decisions quickly and accurately. Additionally, planning your purchases by setting clear objectives and strategies is crucial to obtaining the best value for your money. This approach can help you make informed choices about where to allocate your resources.

Here is a list of common mistakes made in tax planning.

Not accounting for the depreciation on your tax return.
Incorrectly deprecating the rental property by inadequately allocating the value of the land.
Thinking that all travel costs are deductible.
Assuming you need an LLC to deduct business expenses.
Running an ineffective document management system.
Not using a 1031.
Deducting Education cost.
Getting the wrong legal entity to operate can have serious implications.
Getting wrong EIN for your legal entities.
Ignoring the benefit of cost seg.
Writing off too aggressively and hurting your debt-to-income ratio. This will stop you from qualifying for a loan.

2. Avoiding Doing Research

Before you purchase any property, you should do an adequate amount of research. There are a lot of questions that go into determining the worth of your purchase. You should ask a lot of questions about not only the property but also the area in which it is located. This in-depth research will help you with long-term investment and managing your taxes.

The following is a list of some questions that investors should ask regarding the properties:

Is the property in a commercial area?
Are there any city plans that will affect the property?
Is the property located near any calamity zone or problematic area?
Does the property have all the necessary documents or permit issues that need to be addressed?
What is the reason for the property being sold?
What are the things that need to be repaired or replaced?

3. Doing Everything On Your Own

Doing taxes is a complex and time-consuming activity. It may look like you can do everything on your own, but you are bound to make mistakes. To avoid this, you should seek help from professional experts to plan your business and tax efficiently. For example, most DIY investors make the mistake of deducting their escrow payments entirely. They also typically do not allocate value to land. Experts should be able to alert you to any flaws or mistakes such as this. This can be a huge help to your business, so never hesitate to seek help from them.

4. Securing Poor Financing

Financing is important for any business, and it is equally important to plan your finances efficiently as a real estate investor. Always ensure that you have financial flexibility to make payments or a backup plan to cover them. There are many mortgage services available, but you should be aware of the interest rates and what happens when they rise. If you get stuck with higher interest rates, you may not have enough money to pay taxes when the time comes. Therefore, having a backup plan is always important.

5. Paying More Than Necessary

Finding the right property can be a time-consuming and frustrating process. Once a suitable property is located, a buyer may become anxious to acquire it, potentially leading them to overpay the seller. This eagerness can create an advantageous situation for the seller but a disadvantageous one for the buyer. Overbidding can take years to recoup and may impact both tax obligations and cash flow. In addition to the struggle of recouping the investment, the burden of taxes must also be considered.

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Conclusion

It is always important to have a team by your side to ensure that you are making the smartest and most advantageous decisions. Investor Friendly CPA® will always be ready to assist you with your business. We have a team of experts who can provide you with counseling and guidance for your business. We utilize tax optimization strategies that help save you money. Instead of thinking of taxes as something that drains your wallet, let us think of them to increase your cash flow. When you use strategies that reduce your taxes, you are creating immediate cash flow to put back into your rental business and grow your wealth.

If you have any questions about real estate tax mistakes and strategies, feel free to contact us via phone or email to get started.