Tax Tips & Traps for Real Estate Professionals

Ray White, CPAWhite, Fleming, and Company,

P.C.

The main difference between death and taxes is that death does not get worse each time

Congress meets.-Will Rogers

HousekeepingThe purpose of the speech is not to provide

tax advice & anything stated in the speech can not be relied upon to avoid penalties which may be imposed by the Internal Revenue Service.

Goals for today:1. Fly at 30,000 feet & provide broad topic

coverage.2. Hope that you can say that you were not

bored & that all CPAs are not boring.3. That everyone will walk away with one thing

to think about or investigate further.

Do you understand, really understand your partnership or LLC agreement?•Is buyout based on capital account or fair value?•How is fair value determined?•What about new partners?•How are we going to deal with death or divorce?

Have my partners & I addressed buy/sell agreements?

If something unexpected occurs, how are we going to provide funding to buyout one another (ex-life insurance for death)?

If a buyout becomes necessary, how are we going to determine value? If appraisal (most typical), have we agreed in advance on how appraiser will be selected?

Depreciation: Why Should I Care?Isn’t depreciation just something mysterious

that I pay my CPA to do each year? Why do I care?

Evaluate preconstruction costs. Are you capitalizing direct & indirect costs on property that is being developed?

Cost segregation: On construction projects, do you carefully track all costs to identify items that aren’t “structural components?” (sidewalks, landscaping, furniture, etc.)

What does this guy mean by 179?

Section 179Rather than depreciate business assets over

their required lives (typically 5 or 7 years), taxpayers may elect to expense certain assets in the year that they are placed into service.

The HIRE Act, signed into law on March 18 by the President extended the $250,000 cap (with phaseout beginning at $800,000) through 2010.

Beginning in 2011, the expensing amount returns to $25,000 (with phaseout beginning at $200,000).

Potential to significantly lower effective cost.

…

…..but wait there’s more…..

SUVs Does your vehicle have a GVWR of more than

6,000 pounds & not more than 14,000 pounds?Does it have 4 wheels & is designed primarily

to carry passengers on public roads?If yes, then it could be eligible for Section 179

treatment; which is capped at $25,000.

..still more…179D; Energy Efficient Commercial Building•Far too detailed & specific to coverBut………•Provides an immediate maximum deduction of $1.80 per SF.•Eligible property must be certified as being installed as part of a plan the will meet a 50% energy reduction test.•Plan certification generally must be attached to tax return.•RULE of THUMB = building should be large enough to justify cost to obtain certification.

Peeling Back the layers….the levels of tax when selling a building

When your CPA talks about “unrecaptured 1250 gain,” they are talking about capital gains as it applies to depreciable buildings.

Potentially there are 3 layers:1. Ordinary income-VERY rare now.2. 25% - gain to the extent of accumulated

depreciation3. 15% (under current law) – remainder of gain

Passive Activity Rules

•What are passive activities & why would the IRS care?•Passive Activity Loss is such a major issue with the IRS that they’ve published a 154 page Audit Technique Guide (ATG) titled Passive Activity Loss.•This ATG is available at www.irs.gov•If you are involved with more than 1 business or real estate venture, you need to carefully review passive vs. active status with your tax advisor.

Are you a Manufacturer?To encourage investment in domestic

manufacturing, there is an additional deduction available.

Beginning in 2010, this became even more lucrative as it is equal to 9% of QPAI (limited to 50% of W-2 wages).

Much broader than our traditional concept of manufacturing as it covers: construction of real property as well as engineering & architectural services with respect to the construction of real property.

HIRE Act-Key ProvisionsLost in the glare of the health care debate, on

March 18 President Obama signed the HIRE (Hiring Incentive to Restore Employment Act) into law. Among the key provisions:

Created a “payroll tax holiday” of sorts for hiring unemployed workers in 2010 and an employer tax credit for retaining these new hires for at least one year.

“Payroll tax holiday” applies only to employer-side of OASDI (6.2%).

HIRE Act Key ProvisionsQualified employer = any employer other than

U.S., a state, or a political subdivision of a state.Qualified individuals:

1. Begins employment between 2/3/10 & 1/1/11.2. Certifies that unemployed for more than 40 hours

during 60-day period ending on date new job begins.

3. Isn’t employed to replace an employee unless that person terminated voluntarily or for-cause.

4. Isn’t related to employer. Tax credit of up to $1,000 if remain employed for

52 weeks.

Health Care Reform

•Main idea = there are a lot of tax code changes that impact small & mid-sized businesses. However, the effective date is after 2010 for most changes. •Some of the more interesting changes:•$2,5000 limitation on contributions to FSAs (2013).•Small business health insurance tax credit: 35% of premiums if pay at least 50% of premiums & pay a uniform percentage for all employees….and have fewer than 25 employees….with average wages of less than $50,000.•In 2013, Medicare tax increases to 2.35% on earnings over $250K for joint, $200K for individual.•Also, in 2013, a 3.8% Medicare tax will be imposed on the lesser of net investment income or AGI over the above thresholds.•For the first time, rental income WILL be subject to Medicare tax.

What’s going on with enforcement?Per the 2009 IRS Oversight Board report, the

individual audit rate has double since its low in 2000 to reach just over 1% in 2009 (but 2.89% if income over $200k and 6.42% if over $1MM).

Dramatic increase from 2.8MM to 12MM in “math-error” contacts.

Most common area on non-compliance: lack of support or business purpose for deduction.

On State level, State budget strains usually lead to refund delays & request to support items on returns requesting refunds.

Final Questions??????