4 Real Estate Tax FAQs Smart Investors Ask
The smartest investors know which real estate tax FAQs to ask their CPA. Simply put, making money as a real estate investor can often be the ultimate catch-22; the more property you invest in, the more you stand to earn – yet, the more investment capital you earn, the more complex your tax planning strategy can be! With that in mind, our tax advisors are here to share 4 of the most important real estate tax questions you can ask, along with some of our own insight.
Real Estate Tax FAQs: The Broader Basics
If you are new to the game and will be starting out by investing in rental properties, there are some tax questions you may already be mulling over. Consider the following:
1. Are commercial properties easier to manage than residential?
One of the most common questions among real estate investors is whether commercial properties are easier to manage than residential properties. Typically, the complexity of managing your properties will vary based on many aspects. That said, from a tax standpoint, commercial properties can often prove to be simpler. Although tenancies will vary, you’ll usually shoulder fewer expenses and have fewer tenants as a commercial property manager, making it easier in many respects. However, the best way to ensure you don’t bite off more than you can chew is working with a trusted tax advisor who can get down in the weeds, so you don’t have to!
2. Is my rental property passive or active?
Especially if you are newer to the real estate investment world, understanding the distinction between passive and active rental properties can be easier said than done. The terms “passive” and “active” apply to your income as an investor. To put it simply, active income comes from the work you do, while passive income is what you earn from investing. In the real estate world, typically, the only way your rental property becomes active is if you provide substantial services (like that of a hotel), or qualify as a real estate professional. As far as tax planning goes, it’s a good idea to find a tax advisor with a current understanding of tax laws within the real estate landscape.
Just Starting Out? Consider "House Hacking"
A growing trend for newcomers to dip a toe in the water of real estate investment is called “house hacking”. Essentially, this involves living in your investment property, while renting out rooms or units.
Real Estate Tax FAQs: The Specifics
Now that we’ve covered some pro tips for the individual taxpayer, it’s time to get to the business side of filing season! If you own a business, these next 2 tips will help you immensely during tax filing season.
3. Do I have to file a 1099?
As a property owner/landlord, this is likely one of your most pressing tax questions. Believe it or not, the answer hasn’t always been as cut-and-dry as you might expect! However, the IRS has recently made it more clear that all landlords should file a Form 1099-MISC. Filing this form will help your rental activity qualify as a business for tax purposes, rather than as investment income. As a result, you’ll be able to qualify for some important tax benefits, such as the pass-through tax deduction, home office deduction, and even a startup expense deduction.
4. Who do I send 1099s to?
Now that we’ve established the benefits of filing a 1099, you may be unsure as to who you are required to send them to! Unfortunately, this is where it can get a bit muddy. As a landlord, you’re a passive investor and are not subject to the 1099 form. However, if you are a property manager, you’re on the hook for sending a 1099 to every unincorporated independent contractor you’ve paid $600 or more to perform services on your rental property. So, prepare to send a 1099 to anyone from electricians and repair people to plumbers you’ve hired throughout the year.
We Sweat the Small Stuff for You
As a real estate investor, you have enough on your plate – do you really want to spend your valuable time and money wading through tax codes and paperwork? With an abundance of experience and tools under our belt, our tax advisors can help you save time and money, so you can focus on growing and expanding your investments. If you are ready to make 2021 your year, start by working with our tax team! Give us a call at (972) 771-6707 or visit our website!