Investing in real estate is one of the very best methods to secure your retirement. Having a 401(k) and some liquid retirement assets is very important, but at the end of the day there is very little that provides the same retirement security as a good rental property which generates consistent cash flow.
Fortunately, the tax code is very kind to real estate investors, and typically rental properties will produce a loss for tax purposes even if they are producing positive cash flow. This is because of depreciation, which is a real estate investor’s best friend.
However, it is very important to work with a knowledgeable CPA because making the wrong moves can result in devastating tax results. I recently had a new client who sold a rental property without consulting with a CPA, and he had to pay almost $60,000 in taxes on the sale. This was completely unnecessary and could have been avoided if he’d had the right advice, but he was doing his taxes himself using Turbo Tax.
What is also unique about real estate is that when a tax triggering event happens (a rental property is sold, a 1031 exchange is blown, etc.), there is usually nothing that can be done to fix it after the fact. That is why it is so important for real estate investors to have a reliable CPA that can advise them.
Specific areas in which a CPA can help you are as follows:
- Making sure that your rental business is structured correctly for tax purposes.
- Helping you to maximize your depreciation on your rental property, so that you are hopefully producing tax free cash flow.
- When it comes time to sell your rental property or trade up in value, working with you to see if there is a way to eliminate or defer your taxable gain.
- Seeing if you qualify as a “Real Estate Professional”, which is one of the biggest tax loopholes in the entire Internal Revenue Code.
- Helping you avoid big mistakes, so that you can be successful in your real estate investments and achieve your goals.
The bottom line is this: If things like “passive activity rules”, “Section 1250 Depreciation Recapture”, the “Section 121 exclusion”, or “Active versus Material Participation” sound like Greek to you, then you should be working with a CPA who understands them. I want to be that person for you.