As the year comes to a close, real estate investors have a unique opportunity to ensure their investments are in good legal standing, optimize their tax positions, and protect their assets. By taking a few essential legal actions before the year-end, you can set yourself up for success in the upcoming year. In this article, we'll explore three crucial steps that every real estate investor should consider as they approach the end of the year.
1. Legal Compliance Check and Entity Renewals
As the year comes to a close, it's crucial for real estate investors to conduct a comprehensive legal compliance check to ensure that their investments and businesses are aligned with the ever-evolving landscape of local, state, and federal regulations. Legal compliance is the bedrock of any successful business, including a real estate business. Non-compliance with relevant laws and regulations can lead to a myriad of issues, including fines, litigation, and reputational damage. Therefore, investors should make it a priority to regularly assess and update their practices to adhere to the latest legal standards. The end of the year is a good time to address this.
Key Areas to Review
- Tenant Laws and Internal Procedures: Ensure that your lease agreements, eviction procedures, and tenant screening practices are in line with current tenant protection laws in your area. Regulations can vary significantly from one location to another and they can change from year to year. Be sure that your process is compliant with the current requirements.
- Property Maintenance: Verify that your properties meet all safety and health codes, including fire safety, building codes, and accessibility requirements. Regular property inspections can help you identify and address any compliance issues. This can help curtail multiple potential liability issues in the future.
- Tax Compliance: Stay up to date with tax laws and regulations relevant to real estate investments. Ensure accurate reporting of rental income, deductions, and capital gains, and consult with a tax professional if needed.
- Entity Renewals and Maintenance: Many real estate investors choose to protect their assets and limit personal liability by using legal entities like limited liability companies (LLCs) or corporations to hold their properties. These entities provide a crucial layer of protection, but they require ongoing maintenance, including renewals.
If you've established an LLC or another legal entity for your real estate investments, remember that these entities often require annual renewals or filings with the state in which they were created. Failure to renew can result in the loss of the entity's legal protections.
Check the renewal requirements and deadlines for each of your legal entities. This may involve filing annual reports, paying renewal fees, and updating your entity's information with the state. Non-compliance can jeopardize your personal liability protection and affect your ability to conduct business under the entity's name.
2. Tax Planning and Documentation
Year-end is an excellent time for tax planning and documentation, which can have a significant impact on your financial well-being as a real estate investor. To ensure you're maximizing your tax benefits, follow these steps:
Consult a Tax Professional
Start by scheduling a meeting with a qualified tax professional or accountant who specializes in real estate investments. They can help you assess your overall tax situation and provide guidance on strategies to minimize your tax liability legally.
Discuss potential deductions, tax credits, and incentives that you may be eligible for, such as depreciation, energy efficiency upgrades, or opportunity zone investments. Your tax advisor can help you take advantage of these opportunities before the tax year ends.
Keep Thorough Records
Accurate record-keeping is essential for any real estate investor. Ensure that you have maintained meticulous records of all income and expenses related to your properties throughout the year. This includes rent payments, repair and maintenance costs, property management fees, property taxes, and mortgage interest.
By documenting your financial transactions and retaining supporting documents like receipts, invoices, and bank statements, you'll be well-prepared for tax season. Having organized records can help you claim legitimate deductions and respond to any tax audits or inquiries more effectively.
3. Asset Protection and Estate Planning
Protecting your real estate assets and planning for the future should be an integral part of your year-end checklist. Here are some essential considerations:
Evaluate Asset Protection Strategies
Real estate investments come with risks, including potential legal liabilities. To safeguard your assets, explore asset protection strategies. One common approach is to establish limited liability companies (LLCs) for each property you own. LLCs can provide a legal barrier between your personal assets and your real estate investments, helping to shield your wealth from legal claims.
Review Your Estate Plan
If your real estate holdings represent a substantial part of your wealth, it's essential to have a well-thought-out estate plan in place. Take the time to review your will, trusts, and beneficiaries. Ensure that your estate plan aligns with your current financial goals and reflects any changes in your real estate portfolio. If you don’t have an estate plan, consider consulting with an attorney who specializes in estate planning to ensure that your assets will be distributed according to your wishes in the event of your passing. This step can help you minimize estate taxes and avoid legal complications for your heirs.
As a real estate investor, the end of the year presents an opportunity to not only reflect on your current investments but also to take proactive steps to protect your assets, optimize your tax situation, and ensure your legal compliance. By reviewing your current legal compliance status, engaging in tax planning, and addressing asset protection and estate planning, you can position yourself for success in the upcoming year and beyond. Remember that seeking advice from legal and financial professionals who specialize in real estate can be invaluable in helping you make informed decisions and secure your real estate investments for the long term.
About the Author:
Nic McGrue is a tenured professor of law and the founder of Polymath Legal PC. At Polymath Legal PC, Nic helps real estate investors lawfully raise capital allowing them to generate passive income while creating generational wealth.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.