Real Estate Investor, Beware

Originally posted 2009-01-01 22:53:35. Republished by Blog Post Promoter

The IRS made changes to the tax that will affect 2007 tax returns if the investor claims a loss. In addition, just reporting a loss may cause your taxes to be audited.

The new law has to do with the real estate investor classification. The investor can be classified as a real estate professional. Under the new law, the investor qualifies as a professional, regardless if licensed real estate agent or broker by working at least 750 hours on real estate activities. The IRS considers real estate activities to be renting, leasing, converting, operating, developing, redeveloping, managing, constructing, and acquiring of real estate.

In addition, as a real estate investor you are limited on your deduction to your passive income in the amount of $25,000. That amount decreases as your passive income increases and tops $100,000. Still yet, the eligibility for the deduction disappears as your income goes over $150,000.

The reason this change came about was due to the increase in number of investors during the market “boom”.

The ramification of these modifications to the tax law hit the investor who works a full time W2 job the hardest. Remember, the losses can only be taken on passive income.

However, under that same law there are two classifications for passive losses. There is material participating passive loss and passive loss.

The material participating rule requires that the investor work on each property for 500 hours. The work can be any or all the qualifying activities listed above. The investor can also opt to combine all properties under one 500 hour block, but the election must be made at the beginning of the tax year.

Another tax law change is that in the designation of a limited partnership’s interest. The properties owned and/or held under this entity is no longer considered material participating, so are not eligible for the deduction if there is a loss.

It is important to note that no longer can research of potential properties that the investor is considering adding to his or her portfolio a valid passive activity.

Keeping accurate records is crucial. The investor needs to keep date, time, location, and activities and in some cases it may be helpful to have photos to show evidence.

The changes mention above came out in December of 2007 and are retroactive to 2007 and may be earlier tax returns. Have your accountant review your current and previous returns to make sure you are in compliance.

Related Real Estate Investing Articles

• Help Offered for Indirect Investors With Madoff (nytimes.com)
• House Flipping Makes a Comeback (online.wsj.com)
• Homebuyer Tax Credit Provides Incentives for Buyers Says Elika Associates (prweb.com)

Tax Scams on the Rise

Tax season is over.   However, the IRS is warning consumers about tax scams that could cost them money well into the 2009 tax year.  Those tax scams are:

• phishing
• hiding income offshore
• filing false or misleading forms
• abuse of charitable organizations and deductions
• return preparer fraud
• frivolous arguments
• false claims for refunds and requests for abatement
• abusive retirement plans
• disguised corporate ownership
• zero wages
• misuse of trusts
• fuel tax credit scams

Most of the tax schemes mention here do not affect real estate investors, buyers, or sellers; however, there are several that do affect the individuals mention above so that is why this topic is being covered. 

Phishing is especially important because it has to do with internet tricks used by scam artists to get your most precious commodity, your identity.  Beware of any email that states it is from the IRS or your bank that ask for your personal information.  Remember, the IRS and your bank do not engage in such activity.

Another tax scam that you need to be care of is disgusing of corporate ownership.  Make sure that your ownership is clear and precise when filing your income tax returns.  Have your corporation’s article of organization reviewed by both your attorney and your tax preparer to ensure that you are filing all the appropriate documents.  You will also have to file the articles of organizations, ownership, and register agent information with the state in which your business is incorporated.  The state in which you are incorporate with will ask for updates to the latter information on an annual basis, so ensure this information is accurate and available.

For more information on tax scams, please visit www.irs.gov

Related Articles

Your Bailout May Come in Through Tax Credits - There are numerous tax credit that received a facelift that may be profitable for the taxpayers.

Tax Time is Here - Learn about tax deductions that are often overlooked.

What Has the IRS Done For Me Lately?

Paying Taxes Does Good For Us

Typically, when most of us think of the IRS, we get an unpleasant taste in our mouth or a pain in our stomach, but we do not think about what paying taxes provide for us.  The Gov Gab  blog did a great article http://blog.usa.gov/roller/govgab/entry/thanks_to_the_folks_at about all of the departments that our taxes provide our hard earn money too.  Those departments of the government make our lives better. 

What departments you may be asking yourself?  Well, the US Postal Service do a lot for a 42 cent stamp including getting our mortgage payments to the mortgage company, getting our pay check and social security checks to our door, etc.   Another department is the social security, no matter what we think of whether the money will be there when we retire or not we are grateful for the opportunity to worry if the money is available.  So you see the IRS is doing us some good.

Therefore, we all need to have a better outlook for the IRS because of all they do to help us have a better life.