Your tax bill exhausts a large percentage of your personal and business income. Each individual and business has a unique tax perspective with varying objectives distinguishing each tax planning strategy.
Tax planning requires a year-round, hands on approach from a top tier CPA to ensure tax minimization and asset protection. A comprehensive discussion regarding the various stages and strategies available as tax planning tools requires the scope of a book not an article. This article is intended to serve as an introduction to provide a perspective regarding the overall approach taken to design an effective tax planning strategy.
Several specific personal and business taxation items are unavoidable events. Tax plans are built around and integrated into these items which serve as the foundational components to a comprehensive tax plan.
After obtaining an understanding of your current financial position and future vision; Camuso CPA (CamusoCPA.com) focuses on tools that are within control which can be utilized to minimize taxes. The tax strategies applied consider technical as well as practical matters:
- Character and the Timing of your Income
- Character and the Timing of your Expenses
- Wealth Transfer Planning
- Entity Structuring and Planning
- Debt/Equity Tax Planning
- State, Local, Property Tax Analysis
- Additional Strategies
The real estate industry has become increasingly complex, demanding specialized industry knowledge of tax regulations, accounting standards, financing, regulatory requirements and market conditions.
There are several valuable tax strategies available to real estate investors and agents. Although tax planning is situational, this article provides an overview of tools available to work with throughout the tax planning process to ultimately reach your business, personal and financial goals in the areas below.
- Cash Flow
- Asset Protection
- Tax Minimization
- Succession Planning
- Financial Retirement
Real estate developers can potentially qualify as an investor and not as a dealer with the IRS by holding their property for at least a year capturing a substantial tax benefit by treating their income as long-term capital gains.
Appreciated real estate which has been held for investment that is donated to a qualified charity results in a tax deduction for the fair market value of the asset and no tax is incurred on the appreciated value.
This can result in decreased taxes and increased cash flows in the form of increased deductions and exclusion of income from taxation.
Real Estate Professional Status
There are significant tax benefits for investors who can qualify with the IRS for real estate professional status.
This is a great tax planning strategy that is particularly beneficial when you have multiple rental properties and have an adjusted gross income below $150,000. There are three categories the IRS uses to classify real estate investors, each having different pros and cons.
The first classification is a passive investor which is the least beneficial category and only allows a taxpayer the ability to deduct passive losses against passive gains.
The second classification is that of an active investor. This designation allows a taxpayer to deduct an additional $25,000 of losses against ordinary income.
The third real estate professional classification allows taxpayers to deduct 100% of all real estate losses against ordinary income.
Read more on this subject here: https://www.linkedin.com/pulse/real-estate-professional-status-cpas-perspective-patrick-camuso-cpa
Many clients making this special election on their tax return and have several rental properties can create thousands of dollars in tax deductions resulting in a zero-tax liability at the end of the year.
Income from Fees
Developer and management fees as well as commissions represent substantial sources of cash flow for real estate professionals.
This is treated as ordinary income but real estate professionals are not subject to the passive loss rules with respect to projects in which they actively participate, which permits losses from projects in which they have an equity stake.
Current tax rules generally allow depreciation lives of 27.5 years for residential buildings and 39 years for commercial buildings while land improvements and nonstructural items can be depreciated over much shorter lives using accelerated methods.
Bonus depreciation rules enacted over the past few years have permitted a substantial immediate write-off for assets other than the land and structure.
Cost Segregation Studies
Cost Segregation is a strategy that allows you to get depreciation deductions to reduce your tax liability. Components of buildings can be reclassified into accelerated recovery periods for immediate deductions.
In addition to cost segregations, fixed asset reviews can assess all fixed assets a company owns including real property, machinery, furniture, fixtures, and equipment for reclassification to accelerated depreciation.
Tangible Property, Repairs & Maintenance, Abandonment and Disposition Studies
Repairs to tangible property, such as buildings, machinery and equipment may be eligible for accelerated deductions. Specific asset costs can be reclassified as deductible repairs resulting in expenses paid to be expensed rather than capitalized.
IRC 1031 like-kind exchange
A 1031 exchange is a powerful tool and can save you a substantial amount in taxes on the sale of your property. In addition to federal capital gains investors face state capital gains tax, affordable care act surtax, and depreciation recapture taxes. 1031 exchanges can allow you to defer these taxes indefinitely by strategically reinvesting your capital back into real estate.
Tax rules provide that property held for investment or used in a trade or business can be exchanged tax-free for other property of like-kind which will be held for investment or used in a trade or business.
Sale of land by single-family residential developer to related S-Corporation
A developer who owns land which has appreciated prior to commencement of development can limit the tax on the predevelopment appreciation to the capital gains rate by structuring a sale of the property to a S-Corporation before beginning active development.
Conversation easements are a valuable strategy used to reduce federal and state estate taxes when your estate value minus permitted deductions exceeds the current estate tax exemptions. Donating to a conservation easement to a qualifying group can result in favorable federal tax deductions.
Property, Sales and Use Tax Review
Property, sales and use tax are complex and vary across states which often results in overlooked opportunities for tax savings.
45L Energy Tax Credits
Section 45L incentivizes energy efficient dwelling units with a $2,000 federal tax credit per eligible unit. This is often an overlooked opportunity among investors and developers.
179D Tax Deduction
Construction or improvements to existing buildings are potentially eligible for 179D deductions if the improvements reduce energy use by investing in specific qualified categories.
Additional Tax Credits and Incentives
· Low-income housing tax credits
· Research & Development Tax Credits
· Employment Tax Credits
o WOTC Tax Credits
o Enterprise Zone Tax Credits
Camuso CPA PLLC (CamusoCPA.com) takes an industry focused approach to offering a tailored, comprehensive financial solution focused on cash flow improvement, profit improvement, tax minimization, and financial retirement.
Our approach is based on forging long-term business relationships based on trust and value. Our mission is to provide every financial service to real estate professionals that propels them to achieve all their business and financial goals. Camuso CPA PLLC (CamusoCPA.com) is building a community of 500 entrepreneurial minded real estate professionals to achieve their greatest business and financial objectives.
We view each client relationship as a partnership understanding that we are guiding the most important and fundamental decisions that determine your business and personal success.
Reach out to our team (CamusoCPA.com) regarding any questions about entity structuring or establishing a first-rate comprehensive tax strategy:
- Core Services:
- Tax Planning
- Financial Planning
- Business Consulting
- Cost Segregation
- 1031 Exchanges
- Reasonable Compensation Studies
- Tax Credits and Incentives