The Real Estate industry is filled with victories, losses, and mistakes. The fact that there are so many Realtors and so much business being conducted means that there is a high propensity for ingenuity as well as massive opportunities for pitfalls. You may have passed the Real Estate exam, and you may have a handful of experience on your resume, but that does not mean you have experienced it all. That does not mean that you are infallible. Whether you’re a Realtor working in the industry for the first time helping someone sell their home and upgrade or a seasoned investor looking to gain your next big investment property, these are great reminders of what not to do.
Over the years, many real estate and small business owners across the U.S. have witnessed numerous mistakes that have cost them thousands of dollars in overpaid taxes. We at The Orlando Law Group do not want that to be you (if it ever is call us). We want you to have a deep understanding of the mistakes people make before you must litigate. If you are looking to invest or simply finding ways to run your business like a business, never make these Real Estate mistakes:
Personal funds used for business and real estate expenses are nondeductible
If you are going to use your own personal funds to pay for real estate or business-related expenses, it is important that you are clearly tracking the expenses. Any expenses that are incurred for the business or for real estate are generally deductible, even if you use your personal money. The line between the two should be quite bold, and there should be distinct differences between personal finances and business finances. We have all heard of
Overpaying (Tipping) the IRS will make me “Audit Proof”
Rather than go over, or under, when dealing with taxes it is best to get it right. Err on the safe side and always pay exactly what you owe to the IRS. If you constantly under pay your taxes or cannot substantiate your deductions, then the IRS starts to take notice.
Even if you tip the IRS in one area, it does not necessarily mean the IRS will not make you pay penalties if you underpay in another area. Additionally, it is important for you to make sure to track everything correctly and have the right documentation. To ensure this, it would be best to have a knowledgeable tax advisor to help you with the process.
You are allowed more deductions by being incorporated
If you have a legal entity to operate your real estate business from, make sure to use it correctly. Forming a legal entity does not actually mean that you get more tax deduction. Real estate or business-related expenses may be deductible regardless of where it is paid from. Make sure that your income is being paid to your legal entity. If you need help setting one of these up, we are here to assist you. So many individuals think that they can run a business without being incorporated, but there are real advantages to going through the necessary steps. We can show you how.
Utilizing the Home Office Deduction Incorrectly
Currently, the above statement no longer applies. In fact, since there are so many people that work from home, the IRS cannot audit all tax returns claiming home office deduction. The key is to keep excellent records to satisfy the IRS’s requirements and you should avoid an audit. Make sure to benefit from the home office deduction, and if you have any questions about grey areas, reach out to us. We have worked with many individuals who run their business from a home office, some for many years of their life.
Claiming Deductions That Are Out of the Scope of Your Business
There are still ways to claim many deductions from your real estate business even if you do not take the home office deduction. Some of the items that you can still take deductions for include: real estate maintenance supplies, business-related phone bills, travel expenses, wages paid to contract workers for property improvements, depreciation of equipment used, and other home-based related expenses. Claiming items on your deductions can sometimes be treated like an art rather than a science. We recommend having a scientific, consistent, and tested approach. Never make assumptions by yourself, and include others’ perspectives to make sure you’re claiming the right items.
Filing an extension gives you an extension to pay any taxes owed
Even though filing an extension allows you to extend the filing date of your tax return, it does not extend the time you have to pay the taxes that are due. You still might be charged penalties and interests from the date your taxes are due if you have not submitted them on time. Make sure you set a schedule and keep to that schedule. If you need to, set reminders. Have business partners hold you accountable, and do not let taxes owed build up over time.
You Cannot Deduct General Expenses
Real estate investors have proven to be great at deducting property specific expenses such as mortgage interests, management fees, property taxes, and insurance. However, a lot of investors miss out on general and overhead expenses that real estate businesses have. These include car or travel expenses, marketing expenses, cell phones, and meals. If these expenses are directly related to your business, then they can be deducted. The key is having them planned and managed. With a good budget and great records, you will be able to successfully communicate where your business falls in terms of deductions.
Everyone is used to filing taxes every year, but big businesses try to look at their expenses quarterly. Attaining tracking practices that will maintain good habits and records is vital to understanding what occurs financially over time. Without systems and processes that you hold onto, it becomes easy to have details fall through the cracks.
We at The Orlando Law Group want you to stay aware of the mistakes that others often make. They may seem simple, but when you are running your business, it is easy to get lost in the day-to-day tasks and forget about these overarching items. As always, when there are grey areas involved, it is best to consult a legal professional. We take taxes seriously, and so will the government. We have seen cases where, if the business had been more preemptive and planned better, they would not be in the middle of an audit. This is only meant to encourage you to have a plan, know the pitfalls, and when you need advice, call us. We want to help, and we are here to make your life easier and your business that much better.