Home Real Estate

7 Common Tax Mistakes of New Real Estate Investors

Post on: 19 Май, 2016 No Comment

Over the years, I have come across thousands of real estate owners and small business owners across the U.S. and have unfortunately witnessed many mistakes that are costing thousands of dollars in over paid taxes.

Let’s take some time to look at these mistakes that we should avoid:

Forming a legal entity does not necessarily mean that you get more tax deduction. As indicated in #1 above, real estate or business related expenses may be deductible regardless of where it is paid from. If you do happen to have a legal entity that you operate your real estate business from, make sure to use it correctly. A mistake I often see if someone who has an S Corporation formed to reduce taxes but all income is still being paid to their personal name. If this describes what you are doing, you may want to make the change quickly to that your income is actually being paid to your legal entity.

4. Taking the home office deduction is a huge red flag to get audited.

The above statement used to be true, but those days are long gone. Because of so many people now able to work from home, the IRS cannot possibly audit all tax returns claiming home office deduction. As long as you keep excellent records to satisfy their requirements, you are fine. There is no need to fear an audit. You do not want to miss out on the benefits to taking the home office deduction.

5. If you dont take the home office deduction, business and real estate expenses are not deductible.

6. Filing an extension gives you an extension to pay any taxes owed.

Filing an extension only allows you to extend the filing date of your tax return. It does not extend the time you have to pay the tax due. You may be charged penalties and interests from the date your taxes are due if they are not submitted on time.

7. Can’t Deduct General Expenses

Most real estate investors are great at deducting property specific expenses such as mortgage interest, management fees, property taxes, and insurance. What a lot of people miss out on are the general and overhead expenses that a lot of real estate investors have. Examples include car or travel expenses, marketing expenses, cell phones, and meals to name a few. As long as the general and overhead expenses are related to your real estate business, they are generally tax deductible items even though they are not specific to one particular property.

These are just a few of the mistakes I often see especially from newer investors. Educating yourself is the key to avoid overpaying taxes! There are many ways you can significantly reduce your tax bill … all it takes is knowing how.

Free eBook from BiggerPockets!

Get The Ultimate Beginnner’s Guide to Real Estate Investing for FREE — read by more than 100,000 people — AND get exclusive real estate investing tips, tricks, and techniques delievered straight to your inbox twice weekly!