Want to pay less in taxes? Start a business. Want to create passive income without any tax? Start a real estate investment business. Did you notice there was one word repeated in both basic tax strategies? That word is “start.”
Nothing happens until you start. You won’t make money from your business until you start. You won’t create a passive income stream until you start. And you can’t get tax deductions until you start.
In the case of a business, you can get stuck investigating and training. Maybe you spend tens of thousands of dollars on courses, seminars and research. How much is deductible? None of it. At least none of it is deductible until you start that business.
In the case of real estate, you likely will spend even more money getting training and then researching markets. At the end of the year, you happily show your records to your CPA so you can get all the write-offs. Your CPA is then going to ask, “When did you start?” And that’s where you stuck. If you didn’t start, none of it is deductible.
Once you start, the training that helps you improve is deductible. Once you start, the travel to investigate new markets and make new connections is deductible.
I recently received a note from someone who had bought a real estate property near the end of 2011. They had spent money fixing it up in 2011 and intended to sell it as a fix-n-flip in early 2012. They did sell it. Now the question was, “How much of the money spent to fix the property in 2011 was deductible?”
The answer is ZERO.
There are two possible issues with real estate repair/improvements. First, is the expense a currently deductible repair or an improvement that increases the value and/or life of the property? In the case of an improvement, you need to capitalize and then depreciate the asset. The repair cost is currently deductible.
The second issue is the real problem. When did that property START being an investment that is in service? When did they start? In the case of improving something for sale, it’s just an asset until it’s sold. So, like any kind of inventory you buy for a store, it’s not deductible until you sell it.
If you had put the property into service by renting it, the start date is when it’s available for rent.
Start quick for the best deductions.
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