All Forum Posts by: Jason Malabute

If your adjusted gross income (AGI) exceeds $150K and you are not classified as a real estate professional, passive losses from rental properties cannot be used to offset your earned income. These passive losses are grouped together and carried forward. The passive losses from one rental can offset passive income from other rental properties. This aligns with the other responses in the thread, as passive activity losses (PAL) rules govern how these losses are applied across your rental portfolio.

Yes, since you’re a real estate investor and possibly a high earner, you will definitely benefit from working with a specialized tax professional who understands real estate tax strategies, rather than just relying on an H&R Block preparer.

Yes, since the deal has 70% leverage, you would be subject to UBIT if you're investing through a self-directed IRA.

There are indeed several tax advantages to starting your own property management company. First, it could help you qualify as a real estate professional, which allows for greater tax deductions on your real estate activities. Second, running a management company would enable you to deduct a wider range of business expenses, such as office supplies, travel, and marketing expenses related to managing your properties.

Another big advantage is that, as a property management company owner, you’ll have first contact with a lot of distressed owners who might be open to selling their properties. This could present great investment opportunities. And if you take them out for lunch or drinks to discuss their property, you can deduct those meals as business expenses too.

If you have children and currently give them allowances, you could also consider employing them through the property management company. This way, their allowance becomes wages, which can be deductible as business expenses.

However, keep in mind that many property management company owners report that margins are often tight, especially if you’re only managing your own properties. So while there are tax advantages, running the company itself might not be highly profitable on its own.

Unfortunately, not all CPAs are built the same, just like how not all doctors are built the same. Just because someone graduates from medical school doesn’t mean their skill level is equal. The same applies to CPAs. It’s really important to find a CPA who specializes in real estate. Ideally, you’d want to work with someone who invests in real estate themselves and has several years of experience in the tax field. I’d recommend going through referrals from other real estate investors and interviewing multiple CPAs. See which one aligns with your needs and demonstrates competence. If you feel a CPA isn’t a good fit, there’s nothing wrong with moving on to the next candidate. It’s your business, and you want the best person in your corner.

Hi Tyler,

Since you have rental properties, it’s crucial to get excellent advice from your CPA, who can help you minimize your tax liability and save more of your hard-earned money. This savings can then be reinvested into more properties, allowing your portfolio to grow faster. This becomes even more important if you’re a high earner because taxes can eat up a significant portion of your income. Did you know that for most Americans, taxes are their highest expense each year?

Trying to save money by not getting the right CPA can be penny-wise but dollar-foolish. Think of it like trying to save money on a doctor and potentially jeopardizing your health just to save a few bucks. The same applies to your financial health when it comes to taxes.

Remember, when you pay for quality CPA services, you’re not just paying for tax compliance; you’re also paying for advisory services that help you make the best financial moves and tax strategies. A good CPA will provide greater value in advisory and tax savings through proactive tax planning than the fees they charge. They help you make decisions that lead to significant long-term tax savings, which often outweigh the cost of their services.

It’s called a seasoning period, and the reason you’re required to wait is that lenders want to see that the property is stabilized and that you’re consistently making your mortgage payments every month. However, not all lenders require a seasoning period, so it’s always a good idea to ask the lender upfront if they have this requirement before choosing them for your financing needs.

The size of your tax return, whether it’s 250 pages or more, doesn’t inherently increase your chances of an audit. The key factor is ensuring you have proper documentation to support all the transactions, deductions, and income reported. As long as you and your CPA maintain thorough and accurate records, you should be in good shape. The IRS focuses more on discrepancies, missing information, or suspicious patterns rather than the sheer volume of the return itself.

It’s great that your CPA is knowledgeable and has handled IRS representation before. With solid records and compliance, there’s little reason to be overly concerned about the size of the return.

Hi Tanya,

At the beginning of 2023, I was very close to purchasing an 8-unit deal in Overland Park, which is part of the Kansas City metro area. I even flew out to Kansas City to meet with the owner and other contacts. One of my meetings there was with a real estate lawyer who specializes in legal contracts. He was recommended to me by a big-time investor in Kansas City that I had built a relationship with, and other local investors also vouched for him.

Although the 8-unit deal didn’t end up closing, I felt confident about using that lawyer if it had gone through. I believe I still have his contact information in my records. If you’re interested, feel free to reach out, and I can share his details with you.

Hey Clay, great questions! So the thing with fix-and-flip projects is that the income you make is treated as ordinary income, not capital gains. That means it gets hit with both regular income tax and self-employment tax (Social Security and Medicare). Unfortunately, you miss out on a lot of the cool tax benefits you’d get with long-term real estate investing—like long-term capital gains rates, bonus depreciation, 1031 exchanges, depreciation, etc.

Another thing to keep in mind is that when you buy a property to flip, you can’t just deduct the purchase price right away. It goes under cost of goods sold (COGS), which means you only recognize those costs once the property is sold. So really, flipping isn’t about tax advantages—it’s more about building up some solid cash reserves so you can eventually invest in buy-and-hold properties, where the real tax benefits start to kick in.