Business Management

Investors: Haven’t Filed Your Taxes Yet? Learn the Advantages of an Extension!

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There are less than 10 business days left until the tax deadline. Will you be filing an extension or will you be pushing to get your taxes done for Uncle Sam?

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For those of you who know me, you probably know that I am a big advocate of filing extensions. Besides being legally allowed by the IRS, there are quite a few other benefits to waiting until later in the year to file taxes.

The Benefits of Procrastinating on Your Taxes in 2014

Let’s face it, not all investors are organized and not everyone enjoys bookkeeping. In fact, in my experience, over half of investors are not comfortable that they have accurate financial information by the time tax deadlines are here. This year, instead of spending the next 10 days buried knee-deep in receipts and bank statements, wouldn’t it be better to simply relax and enjoy this beautiful springtime weather, sipping lemonade in the backyard?

Related: Your Tax Write-Offs Could Affect Your Ability to Get a Loan: Here’s How

In addition to giving yourself more time, another benefit of filing extensions is that 2014 is an important year of tax changes for real estate investors. For the first time, the IRS has released regulations clarifying the differences between repairs and improvements. In the past, most improvements needed to be capitalized and depreciated over many years. This created smaller current year tax savings. Starting in 2014, the IRS has better defined what a repair is and what an improvement is. Although some of the new regulations make it more difficult for taxpayers to reduce their tax bill, other parts of the regulation are actually very favorable to investors.

For example, we are working with a gentleman in Maryland who has a couple of rental properties that he bought and fixed up over the last few years. Because of the new tax changes, he is able to potentially write off a large chunk of improvements he made in previous years that he was depreciating. Now, you may think that is a wonderful strategy for everyone, but you would be incorrect. In fact, if this taxpayer ended up selling his rentals in the following year, then accelerating the depreciation for 2014 may not have resulted in an overall tax benefit.

By filing an extension, this client now has more time to see if accelerating the depreciation would make sense for him as he continues to evaluate whether he will sell or keep these rentals.

As I indicated earlier, there are no penalties for filing extensions; as long as you make the necessary tax payments by the March/April tax due dates, there are no penalties for filing extensions. Even if you did end up paying taxes, sometimes that could be a smart move. I have a handful of clients who use hard money for their real estate deals. When you compare the cost of hard money loans at 10%+ interest rates, it could make sense to keep your cash longer for your deals and pay Uncle Sam later on in the year at a much slower penalty and interests.

To be clear, I am not saying that you should all not pay your taxes or delay your tax payments. You need to analyze your own situation and decide if paying the IRS now or later would make the most sense.

If you decide to file extensions, what are the next steps?

3 Steps to Filing a Tax Extension

Step One

Decide if you would be able to make any extension payments. If you have the cash to do it and if it makes sense financially to do so, then it is generally better to pay Uncle Sam by the April 15th deadline.

Step Two

Take some time to estimate what your income and expenses are. Now, I am not talking about sitting down for hours and hours poring over receipts. When we make estimates for extension purposes, it is just doing your best to come up with an estimate of what you think your income and expenses are. There is no need to get down to the nitty gritty. Taking note of your large income and expense items and doing your best guess on the rest is generally sufficient for extension purposes.

Related: 3 Reasons You Should LOVE the Home Office Tax Deduction

Step Three

Contact your tax advisor as early as possible. If you ask any CPA or tax advisor, they will likely tell you that April is already considered “late.” However, if you need extensions filed, you want to make sure that you contact your advisors so that they can do it for you. If you do not owe or anticipate owing any taxes, then extensions should be something fairly simple that your tax advisor can assist you with. If you need extensions calculated, be prepared to tell the advisor what your estimated income and expenses were for 2014. This way, they can quickly help you figure out how much to pay to the IRS by the deadline.

Investors: Have you done your taxes yet? Do you plan on filing an extension?

Leave your questions and comments below!

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 ye...
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    Cheryl C. Investor from Reston, VA
    Replied over 5 years ago
    Thanks for another great post! Question, we got a refund last year but expect to pay this year due to some significant additional taxable events. What are the rules for required payments April 15th when filing an extension?
    Amanda Han Accountant from Fullerton, CA
    Replied over 5 years ago
    Thank you for your question Cheryl. To avoid penalties you should try to pay in at least 90% of what will actually be owned by 4.15.15.
    Replied over 5 years ago
    Thanks for helping me justify my procrastination! I told my CPA in February that I would have everything to him within the week…
    Replied over 5 years ago
    In addition I understand that late filers get less scrutiny. Especially if you file 1065. I guess that’s why the rich always file extensions? Good info.
    Amanda Han Accountant from Fullerton, CA
    Replied over 5 years ago
    Thank you for your comments!