Devin Redmond and Thomas Castelli play key roles in the real estate industry. Redmond is head of customer service at Stessa, a company that produces a powerful financial tool that helps real estate investors maximize profits. Castelli is a commercial real estate investor, tax analyst, and CPA at The Real Estate CPA.
Both men want to provide tips for handling real estate taxes. The time of year is quickly approaching to file taxes, and whether or not you prepare your own taxes, it is essential to get information on this topic. Even when you hire a CPA, it is important to make sure that this professional maximizes your tax deductions and benefits.
Redmond’s and Castelli’s Commercial Real Estate Backgrounds
As previously stated, Devin Redmond holds a management position at Stessa. His career began as a tenant rep broker in Los Angeles. He extended his commercial real estate experience as an owner/developer in the Bay Area. As the economy began to decline, he spent long hours renegotiating leases, uncovering ways to lower operating expenses, and running a lean portfolio. The major lesson he learned was the sophisticated way that institutional investors run their numbers.
The “sophisticated” route differs from strategies used by beginner investors. For example, a newbie may use QuickBooks or may hire a rental property manager. This provides a general income statement. On the other hand, Stessa provides an income statement and a net cash flow report. This gives a better sense of how a business is doing and does not just acknowledge the debt. Thanks to the great support centers at Stessa, investors may learn how to interpret their results.
Thomas Castelli studied business and accounting in college. Through his experiences, he uncovered that real estate was a common factor involved with building finances. He began networking and dove into investing. One of his greatest successes was closing a deal for an 82-unit property. Eventually, he joined The Real Estate CPA. This allowed him to blend his love of real estate investing and number crunching. Currently, he is a tax strategist who offers services to all kinds of investors.
Key Things That All Real Estate Investors Should Do to Prepare for Taxes
Castelli explains that the most important thing to do in preparation for tax time is to keep solid records. Also, he recommends understanding ways to lower tax liability. He emphasizes that this should be done throughout the year; however, he understands that people wait until the last minute to worry about this type of activity. In this case, he recommends contributing to a retirement account. Also, he advises engaging in cost segregation studies.
What Is Most Often Missed by Investors?
Castelli explains that many investors miss deductions. For example, some individuals believe that not taking a depreciation distribution will avoid depreciation recapture tax upon sale. Unfortunately, the IRS always assumes that investors take this deduction. He stresses the importance of taking these deductions.
In other instances, many investors fail to take advantage of home offices. This is especially big as more and more people are working out of their houses. A home office deduction lowers taxes and allows for tax-deductible trips. When a home office is being used, commuting to the bank, picking up supplies, visiting retail properties, and similar tasks are all tax-deductible. He explains that many people fail to take advantage of this for fear of being audited. However, he claims this is a myth.
Clarification of the Qualified Business Income Deduction
The Qualified Business Income deduction allows you to take 20% of business income as a deduction. Some individuals question if their rental businesses qualify, especially landlords. Recently, the IRS issued a safe harbor that explains the qualifications necessary to be able to take this deduction. To explain, a property must be held to a person’s name or through a disregarded liability partnership, including an LLC. Also, an enterprise may qualify. Castelli reiterates the importance of keeping separate books and records for each entity.
Other Things Real Estate Investors Should Know About Taxes
Redmond recognizes the importance of discussing 1031 exchanges. These are swaps of one investment property for another that allow capital gains taxes to be deferred. He explains that they are smart long-term strategies that bring financial success. It allows you to avoid paying capital gains on the sale of any property. Upon death, heirs receive a fair market value of the property. In the end, all capital gains are eliminated.
“Real Estate Professional” Status
Castelli explains that if you work full time in real estate, you are treated as a tax professional for tax purposes. This means that you can take losses from rental properties against active income. Therefore, you may purchase a bunch of properties and may perform a cost segregation study. This allows you to break the parts of the property into individual class life. In other words, when losses occur, they can be used against your active income.
2021 Tax Preparation
The above tips should help you to be better prepared when filing your real estate taxes. People often get very nervous and fail to understand the unique deductions that are available and how to apply them. Going forward, remaining educated and informed will help you to achieve the highest amount of financial security.
Disclaimer: 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.