Tag Archives: tax

Section 179 Depreciation

Use Section 179 Tax Deduction on Your SUV

Section 179 Tax Deduction Overview

People complain about our tax system.   I actually like our system.  It favors those who know the section 179 vehiclerules.  My favorite tax rule can be found in IRC Section 179 tax deduction.  This section of tax code defines the accelerated deductions available for tangible personal property used for business use.  It is a great way for the government to help you purchase the capital equipment you need to run your business.  Section 179 is part of the stimulus package enacted in 2008 and it keeps getting extended.  You immediately can claim up to $25,000 deduction on a Section 179 qualifying vehicle.

Section 179 Limits

The yearly Section 179 tax deduction limit is $500,000 per year.  You may purchase up to $2,000,000 of qualifying property each year.  The bonus deprecation has been extended.  It is 50% in 2016 and 2017, 40% in 2018 and 30% in 2019.

Business Income Sources

1)     Net income or loss from your business

2)     Net income or loss from the spouses business

3)     Proceeds from the sale of assets from you and your spouse’s business

4)     Interest income from you and your spouse’s business

5)     Net income or loss of your rental property business

6)     Gains or losses from the sale of rental property which qualify for section 1231

7)     And finally, you and your spouse’s other W-2 earned income

That is a lot of income.   I purposefully saved the W-2 income for last.  It is the source of the most confusion (I must reiterate here that I always advise using a tax specialist.  I do not give tax advice.)

Married Tax Payers and Section 179

The IRS treats you and your partner as single taxpayer when you file jointly.  If you file separately, you must declare how you are going to account for the Section 179 deductions.

Section 179 Example

Your business has $10,000 income for the year and your spouse earned $75,000 in W-2 income.  You buy a qualifying SUV for $37,500.  Your total income is $85,000.  You deduct the maximum allowed $25,000 for the vehicle. You are under the $500,000 limit.  Your taxable income is now $60,000.  If you are in the 30% tax bracket, you just saved $7,500 in federal income taxes. 

Section 179 is a rule you definitely want to know, understand and use.  It will help save you tens of thousands of dollars in your business.  

Follow me and like me on Facebook.  

Do not miss out when I discuss the rules and game plan on how to make these deductions real in your life.

2,819 total views, 1 views today

tax deductions for rental property travel

How to take tax deductions for travel to rental property

Deduct Mileage to and from Rental Property

You can take tax deductions for travel to rental properties if you know the rules.  Under normal circumstances travel from home to rental property would not be deductible.  The travel would be considered personal.  Traveling from home is commuting like driving to a job.

Like most things it is not black and white.  The key word in the sentence is the word “home.”  There is a provision to take a deduction for the travel if you meet certain criteria.

You can deduct mileage when traveling to your rental property if you meet two criteria

1)  You are engaged in the business of owning rental property

2)  You have a home office from which you commute.

So if you are in business and the primary location of the business is your home office, then the travel to the rental properties is deductible as a business expense.  You have to love our tax laws.

Rental Property is either Business or passive investment

26 U.S. Code § 1231 – Property used in the trade or business and involuntary conversions

(1)General rule The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year,

Rental Property Business Activity

The rental properties meet the Section 1231 definition of property used in a trade or business.  You qualify as a business when you materially participate in running rental properties.  Material participation should be ongoing and regular to qualify.  Participation includes activities such as maintenance, hiring contractors, collecting rent, keeping accounts, screening tenants. Etc.  See How to claim passive loss limitation exemption for more criteria on being considered a business with active participation.

Rental Property Passive Investment

If you do not participate in the running of rental property, the IRS will see the activity as a passive investment.  Passive investments ae not running a business.  For example, I own stock in my 401k.  I do not participate in the decisions of the portfolio or manage the fund.  I am not a mutual fund manager Therefore; I am a passive investor.

Home office

If my regular place of business is my home office, then travel to the rental property is deductible because I am traveling as an active part of my trade or business.  I must let contractors in for maintenance.  I show the property to prospective tenants.  In fact, travelling to the properties to conduct these activities is one way to prove I am actively participating.

Benefits of Real Estate Businesses

The tax benefits of owning real estate are accelerated and enhanced if running them is treated as a business.  Jodywallrealtor.com and Cincero Investment Properties, Inc. exist in order to make real estate investing available and easy.

797 total views, no views today

taxcut

How to claim Passive Loss Limitation Exemption

Passive Loss Limitation Exemption

Passive Loss Limits

If you are invested in multiple residential properties and an active buy/fix/ hold investor, then you will come up against the $25,000 passive loss limitation imposed by the tax code in section  IRC § 469(g).  It is imperative that you understand IRC § 469(c)(7) for real estate professionals.

My Real Estate Professional Story 

Here is my story.  Two years ago I first became very active in buy/fix/ hold.  I studied the rules

Get your $50 card now.

Get your $50 card now.

on capital gains vs. expenses.  I trained my contractors on what to do.  I kept meticulous records.    I was set to deduct my passive losses against my regular income and did I need it.  My husband got a new job and as part of the severance he had to cash in his stock options or lose them.  We had a lot of capital gains and did not withhold money to pay the taxes since we did not expect a job change.  We sent our records to our accountant and crossed our fingers.

The day came when the phone rang.  I knew it was our accountant before I picked it up.  I asked, “Bob, give it to me strait.”  He said we owed over $15,000 in taxes.  When I picked myself off the floor, I asked him how that could be?  We had so many deductions?  We kept good records.  I expected something but not that much.

He said, “Jody you are maxed on your passive loss deductions.  Your AGI put you over the amount for the $25,000 loss.  We will carry the deductions to the next year.”

“No way Bob! I cannot be maxed on the passive loss deductions.  I am a real estate professional.”

“I know.  You gave me your Realtor® number but that does not count.”

“Bob, you did not understand me.  I am an agent but I AM a real estate professional.  My occupation on the tax form says property manager.  According to IRC § 469(c)(7) for real estate professionals I am exempt from passive loss limitations.”

Bob agreed to re-figure my taxes and said he would get back with me at the end of the week. Later that week he called and said we will get about $5,200 back on our return.  After I came down from the ceiling I thanked Bob and asked for him to e-file our return.  Knowing this one section of the tax code saved me over $20,000 in taxes in one year.

Passive Loss Exemption Rules

Here’s what you need to do to qualify as a real estate professional.  It is not about being a Real Estate agent.  To qualify as a real estate professional, the taxpayer must spend:

  •  more than 50 percent of his/her time in real estate activities; AND,
  •  more than 750 hours in real estate activities.
  •  A real estate professional must materially participate in each rental activity for the loss to be deductible

How to qualify as a real estate professional

Real Estate Professional

Real Estate Professional

To be a real estate professional, you must spend the majority of your time in real property businesses:

  •            Development or redevelopment
  •            Construction or reconstruction
  •            Acquisition or conversion
  •            Rental
  •            Management or operation
  •            Leasing
  •            Brokerage, not sales agent

One spouse alone must meet both tests. In addition, services performed as an employee do not count unless the employee is at least a 5 percent owner in the real estate business.

You can show your real estate business activities in many ways. Like with anything, it takes good record keeping.

Hint:  Reduce the amount of time you work on your job.  You only have to count hours as work that you actually spend doing work.  Deduct vacation time from the total.  Travel time does not count as work.  You can deduct time you spend at meetings.  In all, you may not work a full 40 hours a week for 52 weeks. 

Achieve the real estate professional time requirements

Capitalize on down time to run your real estate business.  Education is material and necessary for your job.  You can listen to tapes to and from work.  You can search for properties during lunch.  Going to conferences and networking also count.  Did you show a property?  Place an ad?  Do tenant screening?  Select, hire and pay a contractor?  These activities will help you get to the 750 hours.

I document all of my appointments, viewings and travel in my Tax Bot.  I keep all of my expenses in there as well.

Finally, before rental losses are deductible without being limited by the passive losses rules, the taxpayer must materially participate in each rental.  This can be difficult to document.

Group properties to achieve material participation

Fortunately, you are able to make a one-time election to treat all of your rental properties as a single activity.   This filing is done once.  Add the statement to your tax return.  Even if you outsource the property management, be sure to have the contract state that you have final say on all tenants and that you must approve all expenses over a certain amount.  I would do this as a matter of good business practice.

Learning these rules and executing a plan can save you thousands in taxes.  I was able to put money down on another property with my tax savings for the one year alone.

1,472 total views, 1 views today

Graduates walking

How to get a college tax deduction paying your children

Pay for college and get a tax deductionTax Return

Learn a great tax deduction strategy.  Helping your children pay for college is one of those benefits of being a parent.  Helping them pay for college and getting a tax deduction is a benefit of being a business owner.  This post applies to your college age children over 18.  When you hire a child who is under 18 for your proprietorship, they are exempt from payroll taxes.  However, that is not the case for children over 18.  Here is how you get the college tax deduction.

Hire the child for odd jobs

Summer is a great time for children to earn some money for college.  You will likely have odd jobs around your Home Office during the summer months.  Things your children can do include

  • prepare mass mailings
  • distribute fliers
  • make home office repairs
  • Update social media campaigns
  • Work on your website
  • research blog posts

Contract labor rather than W-2 employee

If you hire your child as a W-2 employee, you will have to pay employment payroll tax.  You will not pay these taxes if you hire the child as contract labor.  You ask, “Does this make my child subject to self-employment taxes?”  No

The Supreme Court ruled that self-employment trade or business meant the job needs to be have continuity and regularity.  The contract jobs described above are not regular.  They are certainly not meet continuity.  They are not part of a trade or business.  There is no expectation that your child will start a business performing occasional tasks like those described above.  They are one-off tasks.  Such activity ends with the summer.

Because your child is not in a business, you provide all of the materials.  They provide the labor.  They should not have business expenses to claim.  

Making the college tax deductions work

You pay your child $10,000 for the summer.  There are no payroll deductions.  It is a business expense to you and you deduct the $10,000.  In the 30% tax bracket, you save $3,000 in federal taxes.  The child will pay 6% or $600 in taxes.  The net savings for the family is $2,400 and the added bonus of the child learning to earn money.

DISCLAIMER

This article is for training purposes only.  Jody Wall does not warranty the accuracy of the training.  It is not intended to be legal or accounting advice.  Seek competent consultation for your particular situation. Readers assume all responsibility for their decisions.

627 total views, no views today