Year-end Tax Tips Property Owners Should Know

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David Polatsek from Interra Properties shares his December tax advice

Property rental provides more tax benefits than nearly any other investment. Planning a tax strategy is one of the most important moves landlords and property managers can make at this time of year. Smart tax planning is not just taking advantage of benefits that are available to minimize one’s 2011 tax expenditure. It also involves engaging in methods that will lower their tax burden throughout the coming year, as well as seeking the latest tax opportunities that are on the ever-changing real estate horizon. David Polatsek, Vice President of Interra Properties, shares some tips that can help landlords navigate their way through this complex procedure.

1. Think Like a Shopper
By doing thorough local research, owners may be able to find end-of-year deals which can make a huge difference to their property’s bottom-line. End-of-year deals aren’t confined to retailers anymore. As an example, larger companies such as New York’s real estate consultants Jack Jaffa & Associates (http://www.jackjaffa.com/tax-incentive-services) started a promotion to beat every J-51 deal that is currently being offered citywide for those who contact their tax division before December 31st. Talk to an accountant or tax adviser or search online to see if any deals are available in your area.

2. Energy-Saving Home Improvements
Landlords who make qualified energy-saving home improvements by the end of 2011 can claim a tax credit of up to 30% of the expenditure. In order to qualify for the credit, improvements must meet federal energy-efficiency standards. For more information go to http://www.EnergyStar.gov.

3. Rental Expenses
Most people don’t realize how many expenses can be accelerated to minimize rental income. While the larger ones, like interest payments related to a property, are well-known, other expenses also qualify and should be taken advantage of. Qualifying expenses include, but are not limited to, education courses, utilities, rental advertisements, mobile phone fees, subscriptions, cleaning and maintenance, commissions, association dues, condo fees, insurance premiums, printing, local property taxes, management fees, pest control, professional fees, rental of equipment, repairs, supplies, trash removal fees, travel expenses, and yard maintenance.

Automobile expenses can either be claimed using standard mileage calculation or actual expense. Standard mileage rate can only be used if the vehicle is owned and the standard mileage rate was used for the first year the vehicle was placed in service, or if the vehicle is leased and the standard mileage rate is being used for the entire lease period.

Deciding to stock up on items like office supplies before the year’s end and paying bills early may be a good idea. January mortgage payments can be prepaid to increase interest expense for 2011.

4. Deductible Business Expenses
Investors who spend the majority of their time in the real estate business can be classified according to tax code as a "real estate professional”, in which case their rental losses are not passive. This means that losses are fully deductible against all passive and non-passive income. For investors who don’t qualify as real estate professionals, losses are considered passive and only deductibles up to $25,000 against a rental's income can be accounted for. However, losses of more than $25,000 can be carried over to the following year. As one’s modified adjusted gross income exceeds $100,000 the deduction gradually decreases and at $150,000 is completely phased out.

5. Depreciation Tax Deductions
Investors can depreciate residential real estate improvements over 27 and one half years and non-residential real estate improvements over 39 years. So though a property may actually increase in value every year, the depreciation deduction can affect this increase and in many cases save the investor income taxes. The depreciation either reduces the taxable income of the property or offsets other income the owner receives. A tax preparer should be consulted regarding which income is best to offset a particular scenario.

6. Capital Gains or Losses
If a property is not one’s primary residence, the property is treated as a short-term or long-term capital gain, depending on how long it has been held. Long-term capital gains, which apply to assets held for more than 366 days, are taxed at a reduced 15% tax rate on qualified dividends and long-term capital gains. Previously scheduled to expire in 2008, this lower rate was extended through 2012 by President Obama. Tax loss harvesting could offset 2011 gains or can be used to accrue losses to offset future capital gains that might be taxed at a higher rate.

Speak to your tax preparer before December 31st so that your real estate profit is maximized for this year, next year, and years to come.

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