Matthew MacFarland and Amanda Han are regular CPA and not full -time real estate investors.Matthew Macfarland and Amanda Han’s consent
CPP Amanda Han and Matthew MacFarland emphasizes the main tax benefits for real estate investors.
If you are entitled to reps, you can use losses from real estate activities to W-2 income shelter.
The short -term lease gap also allows you to reduce taxable income using real estate.
The property ownership offers tax benefits.
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It’s “no surprise,” CPA Amanda Han said Business Insider. “I think people usually just don’t know how to use These benefits. “
Han and her husband Matthew MacFarland manages the Keystone CPA -Firm specializing in tax saving strategies for real estate investors. The CPA couple also investing in assets outside of their daily work.
They have noted one less well -known tax strategy, which is especially useful for real estate investors. This allows qualifying persons to protect their W-2 income by using the IRS appointment called “professional real estate status” or reps.
Typically, rental real estate losses are considered passive and can only compensate for passive income. For example, if you work as an accountant and invest in real estate from the side, then your real estate business losses compensate for your rental income, but you cannot take that loss and compensate for your accounting income. This is because they are two unrelated activities.
However, if you are considered a real estate specialist, it all becomes one big activity and you can deduct rent losses from active forms of income, including W-2 and 1099 income.
Note the $ 25,000 “special benefit”, “said Han:” If your income is less than $ 100,000 and you are investing in long-term rent, you can actually use up to $ 25,000 for the W-2 income. “
The benefit is partial if you earn between $ 100,000 and $ 150,000, and it is completely gradually lifted when your modified gross income is $ 150,000.
This means that if you earn more than $ 150,000 and try to use real estate to compensate for the W-2 income, “either you have to be a real estate professional or you have to be married a spouse who is a real estate professional,” Han explained.
She continued, “We call this” a gap in marriage. ” You can continue to get a high W-2 income-toll before your spouse is a real estate professional, then the rent can offset both of your income. ”
Suppose you earn $ 250,000 as an accountant, and you and your spouse are doing a rental real estate business that creates $ 150,000 losses. If none of you are comparable to reps, you are charged for all $ 250,000. However, if one spouse requires repetitions, you can deduct $ 150,000 from your $ 250 00,000 income, which means that you will only be charged for $ 100,000. This can lead to a significant difference in tax obligation. One couple of Bi told how they used this strategy to “swallow” their income taxes for seven years.
Remember that you need to get a loss to get a tax relief. In real estate, it is quite common to generate positive cash flows while showing tax return losses. This is due to deductions such as depreciation – IRS believe that buildings wear out over time and allow each year to deduct part of their property as costs and costs such as renovation.
Amanda Han and Matthew MacFarland are regular CPA and non -full -time real estate investors.Amanda Han and Matthew Macfarland
To get reps, real estate must be your main job, although you do not necessarily have to be a real estate agent. You can meet certain hours and activity requirements. The three basic provisions are the following: you have to spend more than 750 hours a year for real estate activities, more than half of your working hours must be real estate, and you have to participate in your rental activities by participating in daily operations.
“You can imagine if someone works full -time – 2100 hours a year – it will be very difficult to have more time for real estate than their job,” Han said. “But if you have a spouse who has been at home or wants to be a spouse at home, it is there that comes.”
If the qualification of the reps is not possible for you and your spouse, you still have the ability to reduce your taxable income through real estate, thanks to ‘short-term rental gaps, ”the couple explained.
“IRS usually views real estate as passive activities, and if you are in loss, you can only use those losses to compensate for real estate income,” MacFarland said.
However, IRS looks at short -term leases differently.
“If you are involved in everyday operations-you control it independently-you can strategically create losses on paper through depreciation and maximize your deductions, then you can use those losses to compensate the W-2 income,” said McFarland McFarland. “
Han gives an example of someone earning $ 500,000 a year from W-2 income.
“If you are investing in long-term rent and you can’t use it for tax compensation, you may pay 37% of your taxes,” she explained. However, if you turn that assets into a short-term rental and make $ 200,000 from it, “it outweighs your W-2, so you might save $ 74,000.”
To benefit from a gap, your assets must be short-term rental-it means that the average guest stay is seven or less a day-and you have to “essentially participate” in the management of assets.
In order to meet the material participation requirement, the investor must meet one of the seven requirements. “99 % of the time we see one of the top three used,” Han explained: the investor spends at least 500 hours for short-term rent, the investor spends at least 100 hours for short-term rent, but no one else takes more time than they are, and the investor spends more hours than all other combinations.
For example, the investor spends 80 hours of assets, which is more than cleaners and gardeners who spend a total of 50 hours.
Anyone, despite their income level, can benefit from short -term rental tax gaps, Han said: “People with lower income are even more affected. If you earn $ 1 million and save some taxes, great. It’s not life payers.
