Communicating with your CPA and Passive Losses

Investors should definitely communicate with their CPA, but aside from that, there are some strategies that they could use that will help lower their income. But, before we go into that, a lot of people, they don’t realize that with real estate, if they have a W2 job, and they have one or two pieces of real estate, and they’re not considered a real estate professional, that they may not get the benefit of those passive losses. We’ll get call a lot of times where, yeah, I’m making a couple hundred thousand dollars a year, and I bought this real estate because I wanted this deduction. We have to break the bad news to them that, real estate is by nature, passive, and you could be in active real estate, or a real estate pro, but you have to jump through some hoops, and stuff like that.

Let me ask you, when that is the case, that depreciation is not lost, it’s just you can’t use it at that moment in time, right? I mean, you get carry that forward. Is that right?

Exactly. It kind of sits on your personal balance sheet of your tax return as passive losses that accumulate and until you have passive income, or you sell that property, okay? So, when you sell the property, all the passive losses associated with that property are released, and you get them in the year that you sell it, or when you have other income that’s passive, that come through, then it gets offset by those activities. That’s where, if you’re a business owner, and you have real estate, there are some unique planning opportunities that you have these passive losses coming in from your real estate. There are legal ways to create passive income.

Gotcha. I mean, you mentioned before the call, before we started recording, you work with small real estate investors, and business owners, and larger real estate investors, is there a line, I mean, you mentioned passive versus somebody that’s actually a real estate professional, is there a line of investor where you see that is needing more help, or a common issue that you see that you could speak to?

Well, typically, if you have more than five rental properties, you might need a little bit more help than somebody that’s just getting started in the field, but they can all take advantage of certain things such as, the home office deduction, all right, if you do it correctly, what we call a medical expense reimbursement plan, right, which basically allows you to write-off all your out of pocket medical costs.

So, you might have insurance, you might have a high deductible plan, but insurance may not pay for your kids’ braces, or eye glasses, or contact lens, and those are the things that you’re able to write-off through a medical expense reimbursement plan, that if you do the planning correctly, now you get those deductions. Obviously, it helps if you’re making money on the real estate so you get the benefit of those deductions, rather than them sitting there for later on, but at least they’re sitting there for later on.

Right, right, right.

There are a lot of things that, that small investor can do. It’s really just amounts to being proactive and communicating with their CPA.

Gotcha. In your conversations with real estate investors, is there a kind of a strategy talk that you, you know, you’ve got somebody new that you’re trying to help out, or they’re asking questions, or how to get them setup so that they’re going forward? Is there a kind of a do this, this, an LLC, or an entity talk, or can you?

Sure. Yeah. Because we’ve come across a decent amount of individuals that they’re in that smaller stage, and they want to get to the bigger stage, but everyone has to start somewhere. We’ve developed what we call our small real estate investor plan, which is geared toward those new investors. It gives them the things that they need to get some benefit and some tax benefits out of the plan. It’s not a full blown plan that we would normally do for somebody with maybe a business and some real estate, but they still get a lot of benefit, and it sets them up so they can actually make sure they’re doing everything they should be doing, all right, versus waiting for five years, doing it all wrong, and having a problem.

YOU SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.

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Listen to the full episode here.