Remember scrambling at the last minute to get all your financials in order for your accountant at tax time? I certainly do, and it’s not fun. So much so that after that first hectic tax season I implemented a number of financial tracking systems and processes to make tax time easier. And it worked!
This is a familiar story for many investors. The tax extension deadline—October 15—is fast approaching, and as a real estate investor, you may have taken advantage of the extra time. This could have been for many reasons, such as to get yourself better organized, or to wait on K-1s. As you know, tax and financial tracking is a year-round effort, and the better the systems you have in place for tracking, the easier tax time will be.
For real estate investors, this can be a game-changer—for better or worse! There is no underestimating the value of having systems in place throughout the year to make tax time and financial reporting easier.
If you took that extension to get your financial house in order, here are a few things to consider for the tax extension deadline, as well as a few tips as you prepare for your businesses’ future.
The extension deadline for investors
Instead of being buried in tax and financial documents as April 15th approaches, many investors elect for a tax extension. And that’s not a bad thing!
Many sophisticated CPAs argue that most real estate investors should file for a tax extension. This could be true for any number of reasons, but for those who use hard money lending and who need to be liquid for a purchase or flip, having the extra time could be beneficial.
With that in mind, here are some important tax extension considerations worth noting:
- Your tax extension is simply for filing, not for paying, so if you owed money, that was due on March 15th for Partnerships and S Corps, and April 15th for individual returns.
- Start planning for 2020 by getting all your documents organized now while you’re putting together your 2019 return.
- Have money available to pay your estimated tax bill as well as cover your CPA and software costs.
- Make sure you’re engaging your CPA now to ensure all your paperwork is complete.
Expense tracking and taxes are year-round efforts
If you haven’t yet downloaded and reviewed Stessa’s Rental Property Tax Guide, you can find it here. Fully understanding how taxes impact your business and ultimately your bottom line, is a critical element of a sound portfolio strategy.
Now is the perfect time to get your financial house in order,as the end of the year will be here before you know it. Spend the time now to implement systems and tracking, and you won’t be scrambling at the last minute in 2020.
Here are some key tax takeaways that investors should consider year-around:
Repair versus capital expense — Repairs and maintenance are generally one time expenses that are incurred to keep your property habitable and in proper working condition. Capital improvements are additions or changes that raise a property’s value, increase its useful life, or adapt it (or a component of the property) to a new use.
Safe harbor — If you still have taxable income from your rental properties after following the strategies explored in this guide, you may qualify for the 20% pass-through deduction under safe harbor.
The real estate professional status — The real estate professional status historically allowed real estate investors to take unlimited rental losses against their ordinary income. This has now been limited to $250,000 in losses if single (and $500,000 if married) under the excess business loss limits introduced by the Tax Cuts & Jobs Act.
Passive losses — Losses from rental property are considered passive losses and can generally only offset passive income (i.e. income from other rental properties or another business in which you do not materially participate, not including investments). If these passive losses exceed your passive income, they are suspended and carried forward indefinitely until future years, when you either have passive income or sell a property at a gain.
Meals — Any meals incurred within your tax home (a 40-mile radius of your city or general geographic area) are not tax-deductible if you eat alone. If you go out to eat with a business partner, vendor, real estate agent, attorney, etc., then 50% of the meal is tax-deductible. You can also deduct 50% of your meals when you eat alone if you’re traveling outside of your tax home and you already own properties in the destination geography.
Missed deductions — The three most commonly overlooked or missed deductions for rental property owners are:
- Home office deductions
- Travel deductions
See here for a full list of tax deductions allowed for investment properties and real estate businesses.
Tax burden reduction — According to The Real Estate CPA, the most impactful thing you can do is make sure you’re tracking all your expenses throughout the year. Stessa can help you stay on top of the data by automatically importing and categorizing expenses via a secure connection to your bank or property manager. When you accurately track income and expenses throughout the year, you’ll always have a good idea as to whether or not you’re likely to show taxable rental income for the year.
Real estate financing features to adopt today
As you look to build in systems and processes to automate and simplify your financial tracking, here are a few relevant features that can be found in the free Stessa software that will be helpful.
All receipts and invoices scanned with the mobile app are also available on the online platform and vice-versa, so you always have a complete picture of your property expenses. Stessa also gives you the ability to email your receipts to email@example.com.
Stessa’s machine learning algorithm reads all the details and organizes everything for you. All your transaction details are stored in the cloud with bank-grade security, so everything is always accessible and available during tax time or for audit purposes.
Portfolio level expense tracking
Use Stessa’s “Split” feature to easily allocate expenses among various properties or simply associate them at the portfolio level to leave certain items unallocated.
Income and expense tracking
After you add an investment property to Stessa, you can link a bank, credit card, or mortgage account or import data from AppFolio. Stessa then auto-categorizes as many property expenses as possible and leaves the remainders for you to categorize via the searchable drop-down menu. Transaction categories closely track the IRS categories for both Schedule E and Form 8825, which makes tax reporting quick and easy.
Document storage and eliminating paperwork
Having all of your real estate documents at your fingertips makes managing your investments so much simpler. That’s why we unveiled Documents on Stessa. We’ve designed this new feature to give real estate investors one place to easily keep track of, organize, and securely store all of those files. Investors find this feature extremely useful as they save time when searching for key documents.
A profitable real estate investor—with all their hair—is someone who keeps themselves organized and automates logistical tasks.
As you look to file your tax extension this fall, take a moment to put into place some systems and processes that will make 2020 the year you scale and grow your real estate investing business with confidence.