YOU BUY COMMERCIAL REAL ESTATE FOR INCOME TAX BENEFITS…

YOU BUY COMMERCIAL REAL ESTATE FOR INCOME TAX BENEFITS…

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PART VI…

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What you have to realize is that all of the depreciation that I talked about in the last part, PART V, has to get filtered on your income tax returns based on if you are a Real Estate Professional or simply a “real estate investor”.

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A REAL ESTATE PROFESSIONAL IS:

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An Individual Satisfies the Real Estate Professional Eligibility Requirements When Three Requirements Are Met

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1.??Rental real estate is owned. The individual must own at least one interest in rental real estate (§1.469–9(b)(6)).

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2.??The 50% test. More than 50% of the individual’s personal services during the tax year must be performed in real property trades or businesses in which the individual materially participates.

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3.??The 750-hour test. The individual must perform more than 750 hours of service in those same trades or businesses (§469(c)(7)(B)).

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4.??Tax practitioner planning. When considering the RE professional time tests, each spouse must be considered independently. Spouses’ time cannot be combined to determine if the RE professional tests are met.

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And the difference can be enormous.?The Real Estate Professional can take all of the Bonus Depreciation on their income tax return in one year maybe eliminating all of their income tax in that year.?Any loss created by the Bonus Depreciation that exceeds the current years’ income can be carried forward and taken against future income.?And, that can happen, especially if you purchase a large apartment complex.

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The real estate investor, and notice I didn’t even capitalize one letter of that, is limited to taking a Passive Activity Loss of $25,000 in any given year.?Any excess can be carried forward to offset any passive activity gains in the future and to take that $25,000 passive activity loss until it is used all up.?But, getting a $25,000 deduction every year until it is used up shelters a lot of income each year.?And, if you dispose of that property before you use up the entire passive activity loss, you can offset any gain by the unused loss or take the loss on your income tax return once the asset is gone.

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You know, I just reread that, and it hit me how complicated the income tax laws are.?This one fairly simple and straight forward provision becomes somewhat complicated when you consider everything else that it touches or is related to.?And someone once said to me that you should never end a sentence with a preposition.?But seriously, you have to find a Certified Public Accountant who knows all of the things that I wrote about in this section because I have found that not all CPAs, not all Commercial Brokers and Realtors either, know how to save you income taxes when buying and selling commercial real estate and you better find one that does or else you will end up losing so much money that it would be criminal in my opinion.

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This is the last of the articles for getting cash flow, appreciation, and income tax benefits when investing in commercial real estate. As new articles are written they will be posted and then added in this sequence. I will now be reposting some "core" articles on Cost Segregation Studies and Bonus Depreciation and then get into new topics.