by on January 4, 2012 Leave a Comment

When You Think You Know the Rules – the Rules Change

For six years the IRS has been working on new rules for repairs, supplies, and capitalization. Twice over this period they have issued proposed changes giving us some insight into what they were looking to do. Last week the IRS finally issued temporary regulations that take effect January 1st, 2012.

These regulations keep some of the rules that had been proposed, but have made some significant changes. I’m still digesting the 255 page regulations published in the federal register, and can share some highlights of the changes for now. [Read more...]

Filed Under: IRS Tagged With: , , ,
by on December 15, 2011 2 Comments

A US Citizen Investing In Foreign Real Estate

Knowledgeable investors can find some great real estate investments in foreign countries. You do need to be aware of many more laws regulations though when you make these investments and there often are some financial risks that you might not normally see when investing in US properties.
For US citizens that invest in real estate outside of the United States there are special reporting requirements that may be imposed. Rental properties will create income and expenses that must be reported on your US tax return and will also require filing a foreign tax return for the country where the real estate is located.

Often times though real estate will be held in an entity such as a trust, partnership or corporation. All of these entities will require a special information return to be filed disclosing information to the IRS about this foreign entity. [Read more...]

Filed Under: IRS, Real Estate Investing Tagged With:
by on December 8, 2011 13 Comments

A Quick Primer On Depreciation – It’s Actually An Exciting Subject

Depreciation in the simplest of terms is merely the admission that whatever we build on the dirt, and sometimes below, deteriorates over time. Things get old and wear out. Who’d a thunk? The idea is that the real estate investor has put risk capital into improved real estate, an asset that by definition will be subject to breakin’ down. Therefore the Internal Revenue Code (IRC) allows the owner to assign a ‘life’ to these components, with various options as to how.

Without turnin’ this into rocket science, if you own residential income property, except for the land (Yes, Technical Tommie, there are exceptions. Leave us alone.), you’ll divide the value of the investment by 27.5 years. Every year you’ll be able to apply that ‘loss’ (A paper loss, as you haven’t lost a penny.) to the property’s cash flow. If there’s any of that year’s depreciation left, it can then be applied to your job income. The IRS calls that ‘ordinary income’. Tell me that doesn’t come off as condescending.

So, if you paid $250,000, and the market says the land value is $40,000, you’d figure your depreciation like this. [Read more...]

Filed Under: Cash Flow, Depreciation, IRS
by on December 1, 2011 Leave a Comment

Knowing What the Answer Should Look Like Is Important

This week I was reminded once again how easy it is to fall into the trap of relying solely on technology and software to come up with the right answer. I’m not terribly old but I do remember having to do long division and multiplication by hand. When I first started in accounting I used multiple ledgers of varying column widths to track accounts and prepare financial statements instead of computers.

Today, it is easy to place too much trust in the tools we have at our disposal. I say this because it is far easier than many might realize to miskey and assume that our software will properly calculate, store and report on the information we put in.

What does this have to do with anything you say? Well, I find that many times people don’t realize a mistake has been made because they don’t have a clue of what the expected outcome should look like. [Read more...]

Filed Under: 1031 Exchanges, IRS Tagged With:
by on November 17, 2011 1 Comment

Are Your Real Estate Losses Limited By the At Risk Rules?

In the 1980s it was common place to see limited partnerships used in real estate investing. These partnerships often offered attractive ways for investors to reap tax losses that exceeded their initial investments. Some, if not many, investors utilized these limited partnerships as vehicles for tax savings rather than as real investments at least that was how the IRS saw it.

Passive Activity Loss rules and At Risk limits were created to dissuade investors from using these limited partnerships. The feeling was they lacked economic substance — in other words they were not created to make a profit.

I think most investors are aware of what the Passive Activity Loss rules are, but these days many seem unaware of how the At Risk limit can impact any real estate losses in a given year.

Passive Activity Loss rules refresher: [Read more...]

Filed Under: Depreciation, IRS, Purposeful Planning
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