How the IRS looks at your Real Estate Portfolio

I love preaching the gospel of real estate as a means of creating generational wealth because with home prices and interest rates this low, I believe that this opportunity will never happen again in our lifetime.  I would bet everything on that fact.  Ten years from now I am certain that you are probably going to be saying to yourself, “I wish I would have known this.”  For my friends that do know and have purchased this year or last, Congratulations! “6” will be your magic number and you won’t have to depend on a job for the rest of your life.  I am going to give you a free crash course on how the IRS is looks at your real estate portfolio and how to keep as much of your money as possible from the tax man.    The IRS is concerned with taxing your real estate investments in 3 ways; through rental Income, capital gains, and estate tax.

Rental Income

If you are a flipper (no disrespect but it’s a crazy thing to do in this market even though I know people who are still making money flipping and bungee jumping) this section is probably not for you but read it anyway.  The rental income is taxable as ordinary income.  Which means rental income is taxed the same as income earned at the 9 to 5.  However, rental income is better than wages earned from a W-2 because you don’t have to pay FICA.  This is something to keep in mind as you approach retirement.  So how do you reduce your rental income?  Keep the documentation of all your expenses of being a landlord such as mortgage interest, repairs from those destructive tenants (notice I said repairs not additions or renovations), property taxes, depreciation, etc.

Capital Gains

Ok all you “flippers” wake up, this is your section.  The IRS taxes you on any net profits you make on your wholesaling activities.  If you hold your properties for less than a year you pay short-term capital gains tax rate which is the same as your marginal tax rate.  Not great news for all the risk you take.  However, if you hold on to your properties for longer than a year you can qualify for the long-term capital gains tax rate, which can range anywhere from zero to 15%.  A lot better right?  So consider the benefits of the buy and hold strategy.  Just some advice you can either take it or leave it.

Estate Taxes

Hey buddy! Get a will or a living revocable trust please.  I’m in a good mood today so I don’t want to talk about death so let’s discuss estate taxes later.  For now let’s get back to stacking and keeping paper (colloquial for “money”).

2 Comments Add yours

  1. I love your writing style. You have a way of making taxes seem almost fun. And, even I understood what you were talking about. PEACE-

  2. ghi says:

    I really loved reading your blog. It was very well authored and easy to understand. Just like what those in the irs atlanta ga are doing..:)

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s