6 Reasons You Should File an Extension for Your Taxes This Year

by | BiggerPockets.com

For many investors, a deep rooted panic sets in the closer it gets to tax day. Maybe all of your tax documents haven’t arrived yet, or maybe one had a mistake. Maybe you can’t remember how much an improvement was on one of your rental properties, and the receipt is nowhere to be found.

Don’t worry. These are things that happen all the time! Your CPA, as well as the IRS, realize that not everyone can file by April 15th, which is why tax return extensions exist. Some returns are quick and easy, without much going on and can easily be done by tax day. If you are a real estate investor, your return is probably not one of those. With rental properties, fix and flips, syndication deals, and the like, your returns are much more complicated and therefore may take a great deal more time, not only to prepare but to get your documents ready. If you feel like you’re rushing to get everything together for your taxes, then it may be a good idea to file an extension this year.

Please note that extensions are only for additional time to file. Taxes are still due on the original due date: March 15th for Partnerships and S Corps, and April 15th for individual returns. The best way to get this tax paid on time is to estimate what you will owe. Contact your CPA and ask them to prepare an extension payment calculation for you using the information that you have received so far. If you aren’t sure yet what your profit or loss will be from your rental properties, use an estimate along with the rest of your tax documents. If your extension payment ends up being more than you owe, then you can have the excess refunded when you file your returns.

Here are a few reasons why it may be in your best interests to file an extension this tax season.

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6 Reasons You Should File an Extension for Your Taxes This Year

1. No Penalties for Filing Extensions

Extensions are legally allowed by the IRS, so use them to your benefit! As long as taxes are estimated and paid before the March and April due dates, you can extend your returns, penalty-free. Most states also accept the federal extension, so depending on where you need to file, one extension may extend every state that you need. Extending your Partnership or S Corporation gives you until September 15th to file, and extending your personal return gives you until October 15th.

Related: What Investors Should Know About Qualifying As a “Real Estate Professional” For Tax Purposes

2. Less Chance for Mistakes

Oftentimes tax documents arrive late. Your K-1 may finally arrive just days before you need to file your personal tax returns. Other times, you might receive your brokerage statement, only to find out weeks before tax day that they have issued you a corrected form.

If you have a new investment, maybe you’re not sure what documents you are supposed to receive. You don’t want to file too early if you will receive dividends or K-1s later on. When it comes to taxes, the longer you wait, the less chances there are for missing tax documents. If you miss a tax document, the error is fixable with an amended return, but this will probably be at an additional cost to you, as well as added IRS audit risk. So why not extend and make sure you don’t miss anything?

3. Time on Your Side

There is a bit of work that goes into getting your tax documents ready to hand over to your CPA, especially if you are a real estate investor—organizing your receipts, reviewing your books, and making sure that everything is accounted for in terms of expenses. Depending on how many activities, properties, and investments you have, it may take a significant amount of time. Why not give yourself a little extra time? Extending your returns will give you the additional time needed to ensure that your taxes are done correctly and that ALL of your tax deductions are captured so that you are getting the maximum refund possible.

4. Power of the Roth IRA

If you made a Roth IRA conversion in 2016, you have until the date you file your 2016 taxes to confirm or undo your Roth conversion. This gives you all the way up until October 15th to monitor your investment performance during 2017 and determine whether or not the Roth conversion was beneficial to you. If your investments didn’t grow as well as you liked, you are able to undo the conversion and put the funds back into a traditional IRA at zero tax cost. This loophole is only available until the 2016 taxes are filed so you can give yourself more time if you file your taxes by the extended due date, October 15th. Any later, and this perk is gone.

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5. Retirement Planning

Traditional and Roth IRA contributions can only be made until April 15th, but some plans can be extended all the way to September or October. If you plan on making any retirement contributions to accounts like SEP IRAs, 401ks, or SIMPLE IRAs to reduce your taxes, you may have up until the date you file your tax returns to make the contributions and still deduct it for the 2016 tax year. This can help you reduce your tax liability and give you additional time to gather funds for the contribution, if necessary. Depending on the type of legal entity as well as the type of retirement plan, extensions may allow you to defer certain 2016 retirement contributions to as late as September or even October 2017.

Related: How I Learned to Stop Avoiding Taxes — and Got the Best Deductions Yet

6. Multi-Year Planning

More time means more planning! If you file your taxes later in the year, then you have a better idea of where you stand for 2017. There may be opportunities to shift items between tax years to get the best tax savings. Some examples of potential strategies include changing accounting methods, making elections to carry-forward or carry-back certain losses, or taking advantage of the bonus depreciation or cost segregation for real estate. With a better idea of how the following year will turn out and what new tax laws will be, you can make better informed decisions.

Remember that extensions are there especially for investors like you. Don’t rush into filing if you don’t have to. Take the extra time to make sure you have everything you need to get all of the deductions you are entitled to. Don’t wait too long, though, or you may face another tax deadline in September or October—and that one does not have an extension. If you need to, make the choice to extend this year and get the most out of your deductions.

Do you plan on filing an extension this year? Why or why not?

Weigh in with a comment!

About Author

Amanda Han

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

12 Comments

  1. Albert Bui

    Good article Amanda, it would also be cool to see an article on reasons why It’s good to file early by the march 15th (corporate) and April 15th (personal) date when available such as:

    – use of the latest tax return from a qualification perspective since the earlier you file the quicker you can use that return in obtaining capital from the debt side (banks/institutions)

    – less double tracking for the prior year 2016 and current year ahead in 2017. It’s like looking at your front windshield while looking at your rearview mirror at the same time so you can focus on your business plans in the present

    – if tax planning and books were done in advance you can get your refund back earlier assuming tax liability was less than your contributions from earlier in the year

    – and others

  2. Nice article with several compelling reasons to file an extension. However, don’t forget to remind the investors that don’t have “Bigger Pockets” yet that if they are receiving a subsidy from the ACA for healthcare in California (not sure how the other states work) they MUST file on time or risk losing their subsidies. A huge reason for filing on time.

    • Hey Justin,

      As Amanda stated in the article, you have until you file to undo a Roth Conversion, say again undo Roth Conversion. Your contribution must be made by April 15th, 2017 in order to be counted on your 2016 tax form.

      She lists the types of retirement accounts that allow contributions past April 15 in a different bullet point, #5.

  3. Excellent article! Another reason: Statistics show that the later you file your tax return, the less likely you are to be selected for an audit (all other things being equal).

    • Phil Chapman

      Yes, great article Amanda.

      Mike, I was going to post this same comment about the audit and saw that you already have. My wife and I went to a financial success seminar years ago, and one of the “tips” was to always file an extension because it was understood at that time that the IRS’s technology was programmed to fill up half the audit spots by April 15th, then the longer you deferred your filing, each day the chances of being selected for an audit dropped. Knowing how behind-the-times most government technology is, it would be a safe to say that this is likely still the case.

  4. Edward Synicky

    Amanda you’re awesome as usual. I have heard you and your husband speak on may occasions and I learn something each and every time. For those of you in Orange County I am attending the women’s investment club meeting next week to see Amanda in person. All serious real estate investors need to know all they can learn about taxes.

  5. 2 possible downsides. A late filing puts you in a smaller universe of filers thereby increasung the chancesof an audit…and second , with Trump firing off executive orders on practically an hourly basis, my inclination this year is to get my return filed and paid at the earliest possible date

  6. Michael Cross

    Amanda – thank you for your expertise and this perspective. I was very interested in the multi-year planning section especially your comment about how such an extension will empower us with more information from being a most of the way through the following year and allow us to decide which year will benefit us the most.

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