There are many pros and cons of owning real estate that we discuss on Better Life + Finance. Some of our favorite pros to investing in real estate are the tax advantages! We were amazed in our first year of owning our first multifamily property how much our taxes were positively impacted just by owning our home. This article discusses 5 advantages to owning real estate.
Owning real estate can provide several tax advantages, including:
+ Better Tip
When we purchased our first multifamily home, we were referred to a local accountant who works with many real estate investors and owns real estate themselves. We have been working with this CPA ever since and continue to refer our friends and clients to them. We learned that once you add real estate into the mix, personal taxes become a lot more complicated and the opportunities to miss crucial deductions greatly increase. We have peace of mind knowing that a professional is handling the annual documentation of our rental property activities and it is completely worth the cost of the tax service. We keep track of our expenses and income throughout the year and then hand that data off to our CPA and let them work their magic. Our Better Tip? Leave tax returns to the professionals and enjoy your day!
This article discusses the events that lead to me seeking the advice of a CPA (certified public accountant) and deciding to structure my small business as an S-corp. The article also shares the S-Corp benefits that informed my decision to incorporate. Lacking any real business, management or accounting education, earning a small income and being in debt, I failed to make proper quarterly tax payments to the IRS. After two years of poor tax management, I sought the advice of a CPA and learned the benefits to becoming an S-Corp.
by Christian Scully
In 2012 I graduated from college with my BFA in advertising photography. Art school is a great place to explore your chosen medium, but tends to not prepare graduates to own and operate their own businesses, which most will attempt to do as freelance artists. The less-exciting details of running a day-to-day business are completely ignored until either the artist finds themselves in trouble, or until the artist decides to do something crazy like apply for a mortgage and they realize some things aren't so simple. My failure definitely applies to anyone starting a business, not only artists. Discuss the following issues with your CPA to avoid my mistake:
I started my business with no business, management or tax training.
So when I started my own business, Design Imaging Studios, little more than a year after graduating, I was not fully prepared. Granted, I had elected to take some courses outside of the photography college on marketing and professional selling. Ironically, I had the foresight to sign up for a business tax course, and after 3 painful classes and 1 demoralizing exam I swiftly replaced that course with something more bearable. Had the course been an approachable run down on the basics of small business tax, perhaps it could have saved me some future trouble.
Entering 2014 I began operating as a sole proprietorship with a DBA (doing business as...), meaning I could accept payments and market myself as the business name. That first year was a grind, I met with as many potential clients as possible and was managing to make some sales. I was fairly quickly earning more than I was at the one studio job that I had after graduation, but still living week to week. With $50,000+ in student loans, and sporadic income as some months were better than others, and some clients were paying in 30, 60 or 90 days, the money that came in got used up and I failed to make estimated quarterly tax payments. I didn't think much of it, and assumed I would just have to pay a small amount come April 15.
I couldn't afford my tax bill and had to initiate an IRS payment plan.
As April 15 neared, I filed my taxes myself online. I was shown a whopping tax bill (for a 24 year old in debt), including a lovely underpayment penalty. And as I was living week to week and didn't know what I was doing, I did not have a pile of cash set aside for this payment. So I was forced to get on my first payment plan with the IRS. This had me paying the IRS monthly until that debt was cleared (which would take years). The following year I moved to a new city, with a new apartment, trying to do a little better than the year before. While my income increased, so did my expenses. I managed to improve my tax paying skills slightly, but ultimately ended up underpaying for the second year in a row and had my payment plan with the IRS adjusted. This was not sustainable and I knew I needed help. So I reached out to a CPA (certified public accountant).
I asked around for a referral to a local CPA, and became an S-Corp.
The CPA recommended that I incorporate the business under Subchapter S of the Internal Revenue Code: an S-Corp. An S-Corporation is a corporation designated as a "pass-through" entity, meaning the corporation does not pay income taxes but the income is "passed through" to the owners. After reviewing the benefits, it seemed like a great solution for my personal and business needs.
I now use a payroll company to issue myself paychecks, and taxes are paid out automatically.
Alright Tax-Man! I'm paying automatically. I incorporated in January of 2016, gradually paid off my past due taxes on a monthly basis, and now look forward to April 15 now because I never have an issue. It feels good! I was directed to Gusto by my CPA and it works great for me. The monthly cost is reasonable, it's all online and they file all necessary tax forms on my behalf automatically every year. Other than making sure my information is up to date (particularly my state tax rate), I don't have to do much other than click "Run Payroll" when it's time to pay myself. I'm on my 6th year using Gusto and highly recommend it. If you are looking to change your payroll company, or are working with your CPA to incorporate and need to sign up with a payroll service, you can use this link to sign up with Gusto and receive a $100 Visa card.
S-Corp status provides limited liability protection, much like a regular C corp or an LLC.
Having limited liability protection means my personal assets are separated and protected from the claims of business creditors. I feel assured knowing that my business and personal life are separated on paper, and if an issue comes up in the future, I have some protection already in place.
S-Corps are taxed as a "pass-through" entity.
Whereas C-corporations can be subject to "double taxation", when income is taxed at the corporate level and at the shareholder level, income and losses from S-corps are only passed through to the owners. This means the owners pay their fair share of tax on business profits, the business itself doesn't pay any income tax.
Owners of S-Corps can take income as both salary and dividend payments, with significant savings.
This benefit is a big one. Owners are expected by the IRS to take a "reasonable" salary from the business, that salary amount depends on your industry, job, etc. It is going to be different for everyone, and is clearly subjective, though the IRS ultimately keeps an eye on it to make sure the salaries are legitimately "reasonable". In addition to this salary, owners can take direct distributions from the business. These dividends are not subject to self-employment or standard payroll taxes. If I were still a sole proprietor I would be paying 15.3% self employment tax on all income. As an S-Corp employee of my business I pay standard payroll taxes on my salary, and then only pay income tax on my dividends. The savings can be significant.
+ Better Tip
Like all things, there are some disadvantages to becoming an S-corp, and it won't be the right choice for all business owners. There are corporate fees and taxes, some annual paperwork with your local Secretary of State's office, and you'll likely need to use a CPA. While I personally view using a CPA as an advantage, it is an added expense for sole proprietors to consider, if they aren't already working with a CPA. I highly recommend working with a CPA in general, especially as your personal finance, real estate and business endeavors grow over time. We can't all be great at everything, I know I can't keep everything straight and ensure I'm paying the correct amount of tax, and not missing any deductions. I also value being able to reach out to my CPA with questions throughout the year, they are a part of my team. If you are in Rhode Island and need a referral for a great CPA feel free to reach out. The annual fees, taxes and paperwork filing requirements depend on your state and business. Consult a CPA to determine which business structure is right for your needs.
This article details several ways you can research the property tax history for any real estate property in the United States. Using publicly available resources, a homebuyer is able to easily locate the property tax history. We recommend that a homebuyer then verify that is the correct information by researching the most recent local tax assessment value, the local property tax rate and then checking if there are any applicable tax exemptions.
by Christian Scully
Property tax data is part of the public record.
A lot of property information is a made part of the public record, making it available to anyone who knows where to look. It used to be that you would have to venture all the way down to your local city or town hall to request any property records. As more and more towns and cities throughout the country digitize their records, and online database systems improve, it is becoming increasingly easy to find all the information you need in a few minutes right on the web. Here are a few ways to find and verify this information:
Real Estate + Money
Thoughts, ideas, lessons-learned, inspiration, how-tos and more from a journey in small business, to owning and investing in real estate, helping borrowers navigate the mortgage process as a licensed loan originator, in an ongoing pursuit to fund the life and retirement that is chosen, not accepted.