{"id":78224,"date":"2016-05-22T05:00:52","date_gmt":"2016-05-22T11:00:52","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=78224"},"modified":"2021-03-16T11:58:15","modified_gmt":"2021-03-16T17:58:15","slug":"2016-05-22-myths-tax-strategies","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2016-05-22-myths-tax-strategies","title":{"rendered":"3 Common Tax Strategy Myths Taught to Investors at Educational Seminars"},"content":{"rendered":"

Many investors, ranging in\u00a0all experience levels, read books and attend expensive educational seminars. They come away with ideas, their minds are racing, and they want to implement what they have learned.<\/p>\n

It is critically important to engage in learning on a perpetual basis. Growing your mind is key to success and happiness.<\/p>\n

I love it when a client comes to me with an idea that allows us to start a creative conversation. It allows me to educate the client on the strategy and have a candid conversation regarding the applicability to their own situation.<\/p>\n

The problem is that I\u2019ve been finding educational seminars and books tend to pitch tax strategies intended to hype investors up. Hype sells. Unfortunately, the tax strategies that sound amazing either aren\u2019t that great or don\u2019t apply to you.<\/p>\n

I\u2019ve compiled a short list of such tax strategies, and I\u2019m going to explain why some of these strategies don\u2019t hold water.<\/p>\n

3 Common Tax Strategy Myths Taught to Investors at Educational Seminars<\/h2>\n

Myth #1: You can always deduct your passive losses.<\/h3>\n

A newer client of mine called me up earlier this year and was somewhat upset with the result of their tax returns. They had attended a seminar where a good majority of the day was spent talking about tax reduction strategies. Specifically, the presenter harped on the fact that everyone<\/strong> can use the losses generated by their real estate activities and offset their income.<\/p>\n

When my client looked at the return I prepared, they were confused as to why their real estate losses weren\u2019t being used to offset their income. After engaging in a deeper conversation, I learned that the educator failed to mention the requirements to actually take the loss.<\/p>\n

My client was earning more than $150,000. If you\u2019ve read enough of my previous articles<\/a> or forum posts<\/a>, you probably already know why this client couldn\u2019t take their real estate losses.<\/p>\n

Related:<\/strong> 7 Myths About the Real Estate Professional Tax Status, Debunked<\/a><\/em><\/p>\n

On a high level, if your adjusted gross income is above $150,000, you cannot take passive losses generated from your real estate rentals<\/a> unless you qualify as a real estate professional. My client works a full-time job and therefore will not qualify as a real estate professional. As a result, the passive losses are carried forward to next year.<\/p>\n

But the seminar instructor left that part of the equation out. That part of the equation is the \u201cdull\u201d part. That part of the equation doesn\u2019t sell.<\/p>\n

\"tax-savings\"<\/p>\n

Myth #2: Always use the actual expense method for the home office deduction.<\/h3>\n

Many CPAs will want you to use the actual expense method over the \u201ceasy\u201d method if you have a qualifying home office. The actual expense method allows you to deduct a portion of your utilities and phone bill and even depreciate some of your home.<\/p>\n

When CPAs find more deductions, you inherently think the value of their service has gone up. You\u2019re happy because you see a smaller tax liability. The CPA is happy because you paid your invoice in full and quickly.<\/p>\n

The truth is that the actual expense method may be more trouble than it is worth. After all, it takes time to document everything for a home office.<\/p>\n

If you are in the 25% tax bracket and the CPA estimates that the actual expense method will yield $1,000 over the \u201ceasy\u201d method, the tax savings you are looking at will be about $250. A solid chuck of change.<\/p>\n

But how much time will it take you to compile the documentation? Is the CPA charging you for the time they are spending you on the phone with them walking you through everything? What is your time worth?<\/p>\n

For some of my clients, we found that while their savings from using the actual expense method would be several hundred dollars, it simply wasn\u2019t going to be worth their time.<\/p>\n

The other pitfall with the actual expense method is that you are shifting interest and taxes on your primary residence to business expenses. If you are using the home office for your real estate rentals and you are unable to take the passive losses, you\u2019ve moved more deductions into that \u201csuspended passive loss\u201d category. Your tax liability has now increased.<\/p>\n

The \u201ceasy\u201d method simply says that your deduction is $5 per sq ft of home office space annually. This will yield a small deduction, but remember that there can be ulterior motives for having a home office. One such motive is providing you with the ability to deduct transportation expenses between your rentals and primary residence.<\/p>\n

Myth #3: You should use a C-corporation and rent out your home for quarterly board meetings.<\/h3>\n

Establishing a C-corporation sounds like a savvy thing to do. Then you learn you can rent your home out to the C-corporation for board meetings, allowing you to claim even more deductions.
\n
\nRelated:<\/strong> 3 Reasons You Should LOVE the Home Office Tax Deduction<\/a><\/em><\/p>\n

My first question when posed with this creative idea is \u201cwhy are you using a C-corporation?\u201d There are very good instances to use a C-corporation, even if you own rental property. But those instances can be quite rare.<\/p>\n

Generally, investors don\u2019t know why they should use a C-corporation. They learned about it from a course or book, and they were told that it was a great idea. Besides, being able to rent your home to your C-corporation makes you look savvy.<\/p>\n

While this is certainly a viable strategy given the right circumstances, I have found it to be more of a headache than it\u2019s actually worth. Combine that with the average investor, and this strategy is generally not feasible.<\/p>\n

\"house-hacking-tax\"<\/p>\n

Take Advice from Those Who Practice What They Preach<\/h2>\n

Those three myths are the top three strategies that I\u2019ve heard being pitched in various educational resources or seminars.<\/p>\n

I don\u2019t want to sound like I\u2019m bashing this type of education. There is absolutely nothing wrong with selling education. Education has immense value. Even the worst book or educational event can give you at least one new idea that\u00a0can add $1 million to your net worth.<\/p>\n

Just be wary and proceed with caution, especially if you are a do-it-yourself investor. You should only take advice from those who are actively practicing what they are preaching.<\/p>\n

Ask yourself next time you read a book or attend an event, \u201cHow does this person make money?\u201d One who makes money due to their marketing and branding genius may not be offering you the most feasible solutions.<\/p>\n

Feasibility Wins the Day<\/h2>\n

Remember, at the end of the day, it\u2019s all about how much money you are saving versus the time it took to save that money. Some solutions sound awesome, and you\u2019ll be hyped up and ready to implement them.<\/p>\n

But the solution needs to make sense. It needs to run parallel to your goals, be relatively easy to implement, and not take up an exorbitant amount of time to maintain.<\/p>\n

Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.<\/em><\/p>\n

Have you ever heard of these common myths? Any you’d add to the list?<\/em><\/p>\n

Leave a comment below, and let’s talk.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Educational seminars can be highly informative — or they can perpetuate completely faulty information. DON’T fall for these tax strategy myths!<\/p>\n","protected":false},"author":9994,"featured_media":78230,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4241],"tags":[],"class_list":["post-78224","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-business-management"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/78224","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/9994"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=78224"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/78224\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/78230"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=78224"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=78224"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=78224"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}