WHAT THE REALTOR SHOULD KNOW ABOUT INCOME TAXES or WHEN TO TELL YOUR CLIENT TO SEEK A TAX PROFESSIONAL

I was a practicing CPA for over 50 years before I became a realtor. I still go to the CPA seminars on Income Tax Laws, Real Estate Laws, and Real Estate Investing. In the last seminar, I went to there were some very technical items discussed that Realtors should only be aware of but should not give advice on. As Realtors we are not CPAs but should know when to tell our clients to seek tax advice from their tax professional and only hope that their tax professional is not H & R Block!!! The new tax law (Trump's tax law changes from 2017) gives the taxpayer a 20% Qualified Business Income Deduction for certain types of businesses and Real Estate might qualify under certain conditions. There are hours and documentary requirements that your clients have to be aware of and their tax professional is the only one who can help them with that. If you have a client with multiple rental properties, they may be able to group some of them and get a tax advantage. If your client gets involved in a Section 1031 Exchange you should guide them to their tax professional. In a Section 1031 Exchange, you can only defer the gain on real property, like-kind real property like an investment property for investment property and no tangible personal property. Also, primary residences do not qualify for Section 1031 Exchanges, they have their own rules and everyone thinks that the rules are easy, a $250,000 capital gain exclusion for a single person living in a house or $500,000 for a married couple living in a house. Depending on the circumstances, the situation can become very complicated and that's when the tax professional should be called in. There are more questions like, when is someone who owns Real Estate a Real Estate "Professional"? There are different rules for Real Estate professionals and Real Estate Investors. Well, I think I gave you enough information to know that Realtors are not supposed to or capable of giving tax advice to clients. Realtors should have a relationship with a competent and professional tax advisor to refer their clients to.

There is a very valuable tool that Realtors and CPAs should know about and it’s called a "Cost Allocation Study". When building an apartment building, a hotel, or a shopping center you should call in a company that specialized in Cost Allocation Studies. Let's just deal with apartment buildings as an example. One of the main benefits of investing in a multifamily dwelling is DEPRECIATION. As deductible expenses against rental income, you get to write off depreciation. By definition, this is straight out of the textbook that I used to use when I was a Professor at the university level, “depreciation is the systematic allocation of the cost of a fixed or non-monetary asset over the period of benefit”. Now that was the textbook version. The income tax version is the same except that the Internal Revenue Code defines what the period of benefit is for certain classes of assets. rental real estate may stand for a hundred years but, according to the Internal Revenue Code, we can depreciate multifamily residential apartment buildings over 27.5 years. You cannot depreciate the land because the land will be there forever. So, we have to take the cost of the building only over the depreciable life that the government tells us to. But when you build an apartment building you include appliances and other items of personal property. The appliances and other personal property can be depreciated over a period of 5 years. A cost allocation survey tells us how much the building is and how much the personal property is and how much more depreciation you can deduct by breaking out the different components of the building. Now I can get into some very technical discussions of how this works for a Section 1031 Exchange but I won't. That is for your tax professional to do. I just wanted to make you aware of this provision of the law so you know when to seek the proper advice from your tax professional. This provision of the tax law can save you a lot of money if used correctly. A cost allocation survey is not inexpensive but you will save more money than it will cost you if you use it properly.

And remember, yesterday I wrote an article telling you that not many Certified Public Accountants know the Real Estate laws as they should. So, BE CAREFUL WHO YOU CHOOSE!!!

My name is Paul Levine and you can call me at (818) 298 - 4000 after 10 AM Pacific Time 7 days a week. You can also send an email to me at "[email protected]" anytime and I will always get back to you in a timely manner.