Year End Purchase
I am in the process of purchasing a multi-unit apartment complex. We do not have a closing date yet. What are the tax advantages to closing at end of year or first of January? Does it matter?
Thanks -
If you close at the beginning of the month, you get the entire months rental collections to work with, reducing the amount of money you need to bring to the settlement table.
A rental property activity is, by default, a passive income activity. Income from a passive income activity is taxed as ordinary income but self-employment income taxes do not apply. Capital gains tax treatment and 1031 exchange are both available to the rental property investor.
A real estate professional, however, converts all his passive income to active income and loses capital gains tax treatment and loses ability to participate in 1031 exchanges. Self employment income tax may also come into play.
As I interpret the tax rules regarding "real estate professional", you must be first engaged in an ACTIVE income business -- e.g., licensed agent, developer, property flipper, property manager for others for a fee -- and meet the 500 hour material participation rule AND the 750 hour/50% tests before you can claim "real estate professional" status.
Once you are a real estate professional, then the net passive losses from your rental property activity can be converted to active losses without regard to the passive loss allowance limitations.
In my opinion, just managing your own rental property does not qualify for real estate professional status, since, a rental property activity is a passive activity.
Why not incorporate your real estate business and write everything off? No RE Professional limitations. see www.instantinc.us Real Estate Investor Section
Thanks all for your input. I actually found some info from another tax post regarding an internet site with information on real estate professional status requirements. Based on this I am deeming myself eligible. Once again thanks.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BEAE0C945%2D8DDE%2D4446%2D9553%2D5B5DAC7D0003%7D&siteid=mktw&dist=nwtreal
That article is a good summary of the requirements for a RE professional, but I would print the relevant IRS publications as support if I were you.
I read the article and disagree with some of the points it made. For example, the article says that if I actively manage my rental property AND if my income is low enough, THEN I can deduct up to $25K in rental losses.
This is true -- after all that is what the passive loss allowance is all about -- however, the article goes on to imply that you need to spend at least 250 hours per year in your rental operation to qualify for the passive loss allowance.
I disagree, here. There is no minimum time requirement to qualify for the passive loss allowance. The only requirement are that you have at least a 10% ownership interest AND that you actively manage your property. You can actively manage your properties without ever coming close to spending 250 hours per year doing so.
If the author did not get it right on this easy point, how much trust do you really want to put in his assertion that you can be a real estate professional by simply managing your own rental properties?
I have disagreed with this premise before, and continue to do so now. Best to seek advice from a competent authority, and even then, get a second opinion from another competent authority.
I still wonder why you would want the real estate professional status. If you simply want to deduct more that $25K in passive loss allowances from your other ordinary income, then you have to decide whether that is worth the loss of capital gains tax treatment and loss of ability to defer capital gains with 1031 tax treatment.
Another point to consider. Actively managing your own rental property, is not the same as operating an ACTIVE income business. A requirement to be a real estate professional is to materially participate in an ACTIVE income real estate related business. Once again, a rental property activity is defined as a PASSIVE income activity by the IRS, regardless of your level of active participation.
I suspect the author of the article equated active rental property management with operating an active income business. If so, then he started from a false premise.
Once again, get advice from a competent authority.[ Edited by NewKidInTown3 on Date 12/23/2006 ]