Year-End Checklist for Rental Real Estate

Copyright (c) 2009 Tom Wheelwright

As I mentioned last week, real estate is one of my absolute favorite areas in the tax law because there is so much flexibility in how to do things to legally maximize the tax benefits available.

Real estate is also one of the most complex areas of the tax law. This makes it easy to overlook important steps, which can lead to missing out on tremendous tax savings.

I recommend reviewing your tax strategy throughout the year, particularly as it relates to real estate. This makes it much easier to make adjustments timely, minimize oversights and reduce stress at the end of the year and tax return time.

With the end of the year approaching quickly, it is an ideal time to implement a year round strategy to review your tax strategy as it relates to your real estate. Start with my year-end checklist for rental real estate and then adapt it to use throughout the year.

Year-End Checklist for Rental Real Estate

As I noted above, real estate is one of the most complex areas of the tax law. This checklist uses terms and concepts that are directly from the tax law.

Here are a few items from the checklist my team and I use when working with clients:

#1 Understand Your Losses Understand how your real estate losses impact your taxes.

Rental real estate losses have very specific rules. Understanding these rules is the first step to understanding how your real estate losses impact your taxes.

Don't assume it will be the same as last year! Sometimes a minor change can impact how your real estate losses are treated so this is an important item to review every year.

#2 Review Benefit of Depreciation

Determine if maximizing your depreciation deduction will help your tax situation.

It's very easy to assume that maximizing your depreciation is always a good thing, but that is not always the case. For example, if your real estate losses are limited, then maximizing your depreciation deduction may not be your best move.

On the other hand, if your real estate losses are not limited, then maximizing your depreciation may create HUGE tax savings. In this case, look into having a cost segregation study done on new rental properties or rental properties that have never had a cost segregation done. The study needs to be done in order to have your tax return prepared. Get your study done now so it doesn't hold up your tax return preparation next year.

For more information on this topic, see my report in Wealth Strategy U on The Magic of Depreciation. It's in the Real Estate Tax Secrets section of Tax Mastery. Membership is free!

#3 Identify Improvements and Repairs

Many surprises come up in this area so it is best to identify them now. This is also an area that can slow down your tax return preparation.

Here is what to identify:

Have there been improvements made to your real estate? If so, identify the cost of the improvement and when it was completed. Improvements are items that are capitalized and depreciated (deducted over a period of years) for tax purposes. Have there been repairs made to your real estate? If so, review each repair expense to make sure it is indeed a repair.

Here is why this is so important. Repairs can be deducted immediately and do not have to capitalized like improvements. This can have a huge impact on your taxes.

Often times, improvements are incorrectly treated as repairs and repairs incorrectly treated as improvements. This can really throw your numbers off! This can also cause a hold up in the preparation of your tax return, or worse, if it goes undetected, it can lead to filing a tax return with incorrect information.

When I review this concept with clients, I usually get this question:

What is the difference between an improvement and a repair? The general difference is this:

A repair simply keeps the property at its normal operating condition. An improvement extends the useful life of the property, enhances the value or modifies it for a different use.

#4 Real Estate Professional

Status If you are a "real estate professional" for tax purposes, make sure your log of hours and activities are up-to-date.

More Resources As I mentioned, these are just a few items from the checklist my team and I use. Look for my report next week - I'll share more year-end checklist items that apply to both real estate investors and business owners.