What’s the point of getting real estate deductions if I make too much money?

First, the questions themselves:

Question:
All of these great write offs only apply if you qualify as a real estate professional right?

Question: Hi, my wife and I earn more than 250K annually in our day jobs, and I doubt we can qualify for real estate professional status because we cant put in the hours required. Does this mean real estate investing (rental) is out of the question since we cant get ANY tax deductions?

If you make over $150,000 per year and can’t qualify for the real estate professional deduction, then you can’t take advantage of real estate losses against other income.

If you’ve invested for more than just tax benefits, and followed some of the investment fundamentals so you have cash flow, then you can take these real estate deductions against that cash flow.

Try that at your job. Can you make money and never pay tax? You might be able to with real estate.

And what if you have losses in excess of your income? You then have a suspended real estate loss. This loss doesn’t go away. It stays there until you sell the property. It then can offset gain from the property or be used against other income.

In my opinion, good real estate investment still makes sense. It also makes sense to look for and take every legal deduction you can. At worst case, it becomes like a tax savings account, to be used in the future.

The other email included a question through USTaxAid.com, which I’ve promised to answer through blogs.  So here goes:

First, the question:

I desperately need to talk to you about my problems.  (The) IRS file(d) 2007 and 2008 on my behalf. (Tax) plus interest up to $200K after my divorce.

Just got a job for about 6 months and States Tax is Garness (sic) my pay check $50 every two weeks. I have file(d) BK 3 to 4 years ago. I have lost most of my docs after divorce. I paid child support but docs.

Answer: I’m not sure I understand all of the details. It sounds to me that the writer did not file tax returns for 2007 and 2008. The IRS then filed returns. They report all income and don’t report any expenses or deductions.

The taxable income will be much higher than if you had filed. The penalties and the interest will be higher. And the IRS is not in the mood to deal.

Depending on when these returns were filed, it may still be possible to go back and correct them. You’ll need an experienced CPA to help you out with that.  You may also be able to renegotiate an offer in compromise. You can do this yourself, but you’ll probably have better results if you get a tax pro to help you.

If you don’t have your back-up support for deductions, you can probably get those through your banks and credit card companies. It will take some digging and a whole lot of effort, but there is something you can do.

The fact that you filed bankruptcy probably doesn’t have any impact on this situation

Morale of the Story:  If you have an IRS or state tax problem, you have to get in front of it. The longer you take, the worse it will be. If you think the IRS is going to forget and just go away, guess again. When they find you, and they will find you, you may face taxes, penalties and interest like this writer did or you may even have a jail term.

Get help right away. Don’t ignore an IRS issue.

We talk to people every week who have gotten behind in their tax filings. And once you get behind with one year, it becomes two years and before you know it, you’re years behind. And you’re afraid to file because it will open up a whole can of worms.

The IRS just raised the stakes, though. It used to be that you had to worry about penalties and interest if you didn’t file. That was bad enough.

But the IRS is now imposing jail terms for people who get behind on tax filings. If you haven’t filed, we can help. Get hold of us right away and let us help you get caught up and negotiate on the penalties and interest. It’s definitely better to voluntarily file than to have the IRS track you down and force you to file.

Here’s more information on the recent case regarding a non-filer who is now looking at jail:

http://www.wwltv.com/news/local/208632581.html

If you’ve listened to the USTaxAid webinars that Megan and I do, you probably already know that we’re big fans of Series LLC in the right circumstances. As the law gets clearer and since the IRS weighed in how to handle the taxes a few years back, there are more and more right circumstances of when to use a Series LLC.

In fact, if someone tells you a Series LLC is unsafe or unproven, say “thank you” politely and move on. That’s old news. There are a few cases when they don’t work, but to say they are unsafe or unproven is simply wrong. That’s why you need good tax and business structure advice from experienced advisors who work in this field every day.

There are currently 8 states that have Series LLC law. Some states have better law than others. In fact, as much as I love Nevada for a lot of things, right now I’m recommending Texas Series LLCs a lot of the time. But what if you don’t live/work in one of those 8 states? Does that mean you’re out of luck?

No! You just need to learn how your Series LLC can do business in other states. Here’s a very informative article by expert Megan Hughes on this subject.

http://www.smartbusinessincorporation.com/blog/how-your-series-llc-does-business-in-other-states/

Tax is a part of our life. And that means that there are often a lot of questions that come up. So, how can you get a tax question answered?

We have a number of different ways that you can get your answers.

If you have just a simple question, then you may want to get a quick answer for free. The best way to do that is to click through on one of the banners on the right hand side of the USTaxAid.com website. We will then answer the question sometime in the next 30 days through aUSTaxAid blog. Please keep checking back for your answer.

If you want a private consultation with some intensive review, then a consultation might be the best answer. Please contact Richard@USTaxAid.com or via phone 888-592-4769 to set up a private consultation.

If you aren’t sure you’re going to ask the right questions and are more interested in achieving a goal, then a full strategy is the best solution. Please give Richard a call at 888-59204769 to find out more information on the strategies.

Got a tax question? There are a number of ways to get an answer. The cheapest way (as in free) is to ask us a question right here on the USTaxAid website. Look to the right and click through on the banner.

We recently received a question that I’ve heard a lot in my career.

“Hello, I am a new visitor to your site. I have a relatively high income, about 350 to 450K filing jointly with my wife, as medical professionals. Problem is that it is W2 income. I wish to reduce our AGI, I had thought I could do that by investing in real estate, but my tax advisor says I make too much money and since I can qualify for professional real estate investor status, I am basically stuck. Is this true? Is there NOTHING I can do or reduce my AGI legally and thus reduce my tax liability?”

What tax breaks can an employee get? Unfortunately, not a lot. One of the benefits of real estate and that it’s pretty easy to have cash flow you put in your pocket every month and create a legal tax loss. The problem is that if you make over $150,000 per year, you can’t take advantage of that loss against your other income.

At this point, there are two possible solutions. If you or your wife could become a real estate professional (REP), qualifying with all three tests, you could then take advantage of the real estate losses. You can see a FREE webinar on this at http://www.RealEstateLoopholes.com

One of the best, easiest way to create another income source is to start a business. In today’s world, it’s pretty easy to start a side business, especially if you do it online. We’ve got clients making a lot of money these days with online businesses and after the learning curve is done, they don’t work a lot of hours. So it’s possible to do that and keep the day job.

A business lets you take write-offs for things you don’t get as an employee. For example, you likely can write off your home office, your cell phone, your computer, some of your car, travel, pay your kids and more. Of course, it has to be a legitimate business and there must be business purpose for the expenses.

I’m not sure how I feel about the back and forth the IRS is currently having in court regarding tax preparers.

On one hand, I see the financial devastation bad tax preparers can cause taxpayers. I’ve seen tax preparers try to negotiate with the IRS without a clue, file tax returns that are full of red flags and even file returns that are completely wrong without advising their clients. By the time I meet up with them, it’s often too late to undue the cost.

So I understand the IRS wanting to regulate who gets to say they are qualified tax preparers. And, after all, other professionals have regulatory agencies that determine how and when they can practice.

But on the other hand, I hate seeing the IRS get involved in anything else. Their track record isn’t very good and if they’re the ones doing the qualifying as to who can argue against them, that doesn’t seem very objective.

What are your thoughts? Here’s the article that sums up the confusing case where it stands right now. Link to article.

If you missed last Saturday’s webinar “IRS Tax Secrets for Online Business”, you can listen to the replay at http://www.OnlineBizTaxSecrets.com.

Here’s one of the questions we didn’t get a chance to answer:

Question:

Could we pay our younger children modeling fees if we use them for advertising?

Answer:

The answer on most of these questions will be “It depends.” In this case, there are a lot of items to consider:

(1) Is there a real business?
(2) Is there a real business purpose? In other words, do photos of your younger children help your business in advertising?
(3) ONLY if you answered yes to the above two questions, continue on to the three rules we use for hiring dependents.

Rule #1: You need to have a written description of the work done.

Rule #2: You need to pay a fair price.

Rule #3: You need a receipt or time card (if a regular employee) proving the work was done.

Can you take the deduction? Maybe. Just make sure you follow the rules.

This past Saturday, Megan and I did a webinar “IRS Tax Secrets for Online Businesses.” You can listen to a replay at http://www.OnlineBizTaxSecrets.com if you missed it.

We couldn’t get to all of the questions during the webinar, and so, as promised here is one of the questions and the response.

Q: On “nexus” what if you are working with and MLM, who is responsible for the tax? me, as an independent distributor or the MLM company?

Answer: Without a doubt, nexus will be one of the biggest issues for all businesses, and especially Internet-based businesses. In the case of MLM (aka multi-level marketing companies, direct selling companies and independent business opportunities) companies, at this point, there is no nexus issue. However, California has recently asked all California (CA) residents in an MLM to provide the name and addresses of their “uplines” (people who had signed them up). Amway is fighting this.

There is a concern that CA may intend to use this information to then claim nexus on residents in other states. Since these other state’s residents make money because some of their downline is in CA, then CA will make a claim that they owe CA income tax. Or at least that’s the reason we think CA is trying to collect this information.

At least so far, though, no state has been able to successfully claim nexus due to MLM downlines in another state. If there is a product that is sold that should have sales tax attaching, the main company will probably be withholding sales tax. This is something you do need to check directly with your company, though.

Richard and I moved to Baja California full time in 2009. We’d taken a major economic hit in 2008 and thought it was time to just semi-retire at the beach.  We spent a lot of time traveling, gardening, hanging out at the beach and a little bit of time working.  Then things changed, this time for the better, at least economically.

In 2008/2009, things changed and we reacted. Then in 2012, things changed again. One was the slow and steady growth of our full service tax firm, US TaxAid Services. The other was a crazy serendipitous business that started because my partner Megan and I used the wrong URL address. It’s an international business, with all of our sales outside the US, so it’s taken a lot of research to figure out how to do this.

With the growing company and the crazy growing company, our income is up. That means more options. And a company that goes through rapid growth means more hands on time is needed for systems, hiring and technology.  So, we need to move back to the US.

Our businesses are virtual so we can work and live and anywhere there is good internet. Our first stop was Austin, TX.  We spent hours in online research so we knew the area and knew what was happening with real estate prices. Then, we spent hours in key areas we’d identified. After all the hours spent, we knew what was a good deal for us and we made an offer, with a short window. We actually surprised the sellers because we were so certain in our offer. In the end, the deal fell apart, I think largely because the seller and especially his agent couldn’t keep up. Our offer never wavered and it made them nervous that we were so certain and acted so rapidly.

We went back and forth on whether it was worth it to do another trip to Austin to go through the process again. (I love DolfdeRoos’s rule of thumb:  Look at 100 houses, offer on 10, buy 1. That is so close to what we do.)

We instead went to my old hometown of Reno, NV. There are some interesting developments in Nevada that have created a very small market of houses to buy with low rents.  We expect that to flipflop in the next 18 months. Meanwhile, we found a deal with an experienced real estate investor seller. We did a deal quickly and are closing in less than 30 days. (Actually 2 weeks now)

The reason I’m telling this story is that some people looking from the outside in may think we’ve acted without thinking and are jumping from one thing to another.  Texas or Nevada? That’s kind of a crazy jump. The fact is we did a lot of research first. We put in the time first so we can act fast and with clear focus when it’s ready.

That’s how we’ve been able to turn our finances around so quickly. From the bottom at the end of 2008, we were financially free August 22, 2010. And we’re moving up from there.

For us, the answer is research carefully, be really clear about our goals and then act decisively.

I know decisive decisions and actions can be hard for some people. It’s a habit just like any other habit. The first few times you try something new, it will feel uncomfortable. As you get more experienced, it’s easier. The habit of making instant decisions for your business may seem impulsive and it is, only if you haven’t done your homework first. If you dither back and forth, not making any decision you basically derail any chance of ever having a successful business.  People won’t wait for you.

I experienced it again when Megan and I did a webinar this past weekend. I made a special offer, a REALLY good offer, for 5 people for a strategy. There were 2 or 3 people who jumped on it right away. They had signed up because they knew it was a good deal, they knew what they needed and they trusted me and our process.  But then it stopped. Some people needed a lot more information. And sure, we’ll provide it.

And there are still two spots left (at least as of Monday, when I’m writing this blog post) for the special deal at http://www.OnlineBizTaxSecrets.com. But I bet those spots end up being gone before the people with all of the questions get those questions answered.

Do your homework FIRST, so you know a deal when you spot them. The good deals never wait.  That’s how we’ve been able to grow back so quickly. Homework and decisive action – it’s a powerful feeling to be in control.