Real Estate Investment Planning and Taxation
Real Estate is a great means to acquire and preserving wealth; it is also great way to legally avoid or defer tax. Dunham Associates can help you with all phases of real estate investment planning so that we balance wealth creation with tax avoidance to help you achieve your dreams:
Buying and Selling your Personal Residence
Congress encourages home ownership with subsidized lending programs and rewards home ownership with generous tax deductions for mortgage interest and real estate tax. Though homeowners can’t depreciate expenses of home principal, married couples generally can sell their homes without $500,000 of capital gains—a wonderful bonanza to retirees. Dunham may help with calculations if a couple lived in home for less than two years.
Buying Rental Real Estate: residential and commercial
Dunham Associates CPAs knows real estate but does not sell real estate; we are well prepared to advise you on the profitability of real estate purchases. Accountants can gauge the accuracy of seller provided records and assess business opportunities in particular industries or geographical areas. We calculate pricing from rental and expense history and can compare properties to aid you in selection of real estate or negotiations for real estate.
Real Estate ownership and taxation
American Real Estate has appreciated by about four per cent per year depending upon time spans and indices; leveraged real estate can be compared to stock market investments for historical returns and risks. What happens to a homeowner who plunks down a $100,000 deposit and borrows $400,000 at 5% interest? The first year they would pay about $20,000 of mortgage interest and get roughly $5,000 back in itemized deductions. If the home appreciates by four per cent—four per cent of $500,000—they would see capital gains of $20,000 as they save themselves the cost of renting. They get roughly a five per cent return on their $100,000 investment. In fifteen years, with no increase in mortgage payments, this will be a $750,000 investment which delivers roughly $15,000 per year (after mortgage and ignoring repairs) or a fifteen per cent rate of return on the initial $100,000 investment.
Assuming average levels of growth, landlords get the same high rates of return as homeowners, but different tax advantages. They can deduct repairs, cleaning, HOA fees, and management expenses; most importantly, they can depreciate the entire cost of their home and not just the down payment. Landlords frequently can have positive cash flow but slight losses on their income tax return. Small landlords (earning under $100-150k) may be able to deduct up to $25,000 of losses—a privilege denied to others. Larger landlords must save their passive losses until they are ready to sell.
Financing and Foreclosures
If you are considering financing or refinancing your house, or if you can’t make your payments, Dunham Associates CPAs can help with objectivity that comes from having no loan to offer. We act as fiduciaries who consider only your long term financial plans, and the right use of finance may pay off debts and generate cash flows that let you purchase more real estate or flood your retirement plans with well-diversified savings. Let us calculate deductible mortgages or help you to avoid taxation of COD income.
Selling or Exchanging Rental Real Estate
Invite Dunham Associates CPAs to the rental real estate harvest and it may prove larger once passive losses, depreciation and varied expenses have been calculated. Dunham can help first by telling you what your taxes would be if you sold the rental property, and we give you accurate federal and state tax estimates to help you avoid penalties. We may go further by assessing federal and state taxes to tell you which of your properties can best be sold—and how much cash you can expect. We may even compare the taxes of sale with the possibility of a tax free 1031 exchange to defer your tax issues indefinitely. You will need tax professionals for a 1031 exchange because they are the subject of regular audits by the IRS and FTB. And, as we know estate planning tax consequences, we can advise you if you strive to leave real estate taxes to your children with a step up in basis that eliminates capital gains completely.