CPA and tax credit questions

9 Replies

This is a very broad question. Credits are better than deductions, but there are also less tax credits available. 

Tax credit is a dollar for dollar reduction in taxes. A tax deduction reduces your taxable income, For example if you were in the 25% tax bracket, it would basically be 25% of the expense you get back. 

Years ago I got a tax credit for doing rehabilitation on a building that was listed on the National Registry of Historic Places. Sometimes they have tax credits for energy efficiency updates like insulation or new windows. I am not sure what tax credits are available today for real estate businesses today. 

There are many deductions available when renting properties. Mortgage interest, insurance, property taxes, maintenance, advertising, etc. are all deductions. Larger expenses that involve capital improvements can be depreciated. That just means only part of the expense can be deducted in a given year. For example an item with 7 year depreciation schedule, you can take 1/7 per year. There are some rules that allow bonus deprecation, which allows you to accelerate the speed, potentially even deducting it all in year one. That is called 100% bonus depreciation. Items like a new roof, new flooring, appliances, HAVAC are all examples of depreciated items. 

Be aware that any tax credit or deduction is just using regular business expenses to reduce taxes. They have to be legitimate and necessary business expense. You can't deduct your Hawaii vacation to go look at real estate then go sit on the beach. 

As far as LLC, that is generally not a consideration when it comes to taxes because it is usually treated as a pass through entity. That just means for tax purposes it passed through to your personal taxes. Some people mistakenly think that having an LLC is required to have a business or that having an LLC means you have a business. Business is defined by the activity, not the entity.

There are entire books written on real estate taxes and I just scratched the surface here. I encourage you to read these three books:

@Mohamed E.

Yeah, thats pretty broad... But, a LLC doesn't provide any tax benefits unless you are investing with a non-spousal partner, and even then its about legally splitting up the profits/losses mainly. So, you do no get any tax benefits with a LLC, in general.

@Mohamed E.

You are normally eligible for the same deductions/credits regardless of your entity type(individual ownership or as an LLC).

Historic tax credits / energy tax credits are normally the big tax credits available to those who own real estate.