Belated Tax Day cogitations

Monday, October 19th, 2009 | Uncategorized

Today is Tax Day, October 15, 2009. This is the day when all savvy real estate investors are scrambling to get their tax returns filed. If you have already filed your return, or if you file a 1040EZ or 1040A (short form), or if you don’t own rental property, or if you think the most complicated thing that you can do on a tax return is a Schedule C, then please don’t read the rest of this blog post. It will only depress you and make you angry.

For those of you that continue to read this blog post, I presume that you have some basic level of tax understanding, i.e. you know what your tax return looks like and you know what a Schedule E looks like. (Schedule E is where you report rental income and rental losses as well as all of the costs associated with owning and managing rental property. At least that’s what you do on the front side of Schedule E. What you do on the back side of Schedule E will be the subject of upcoming blog posts).

In meeting with my tax man today, we were playing the game of “let’s see what if”. Thanks to Turbo Tax Professional 2009 version together with the flying fingers of my tax man, we were able to determine the impact or non-impact of various ways that we treated various expenses relative to my rental properties. Did we want to take and treat it as an expense or did we want to treat it as an improvement? Some of you are going, “what’s the difference?”. Well, the difference can be significant. For example, we were working on my 2008 tax return that involves a property that I sold in February of 2009. Here is my chance to legitimately and legally engage in a little bit of revisionist history. By taking the various expenses associated with this property (that was at least 50% vacant) in order to facilitate the showings and sale, I can treat it as improvements and capitalize it rather than as a straight deduction.

What’s the difference, you ask? The difference is by not taking the repairs and mortgage interest as an expense, but rather by treating it as a capital improvement, I have increased the basis in the property. Why would I want to increase the basis in the property? I would want to do that in order to either reduce the amount of the long term capital gain or increase the amount of long term loss. It makes no net effect on my tax refund for the year 2008 but it significantly enhances my chances of having lower tax liability in 2009.

The purpose of this blog post is not to impress upon you how smart I am when it comes to the tax code because believe me I am not. What I do want to impress upon you is the fact that you need to think and you need to get a tax professional who is willing to work with you and always be asking the question, what if we do it this way, what are your options and what would it look like if you did it a different way. There are so many different ways of handling your tax matters once you get beyond the boring 1040 and W2s.

(Note – Jeff actually dictated this on tax day, October 15, and but for my intervention it still wouldn’t be up – Caroline)

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