From a small northwestern observatory…

Finance and economics generally focused on real estate

Some end of the year tax madness

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This is generally a fairly slow time around Greenfield Advisors, and I mostly use these last two weeks of the year to get ready for tax filings and just generally get my paperwork house in order. It’s been a great year for real estate investing, and as such you may want to give some thoughts to how to position yourself in these last few tax days of 2021.

First, are you a passive or active investor? For most of you, you’re “passive” which essentially means you can’t use real estate depreciation to shelter non-real estate income. (It’s a little more complicated that that, but you get the idea.) Probably the hardest hurdle to cross as an active investor is documenting that you spent 750 hours or more on your real estate portfolio. Unless you’re an active property manager, that’s probably not going to happen, but if this describes you, then be sure to spend any down time over the holidays documenting that 750 hours. The IRS may want to see the paperwork sometime down the road.

Oh, and if you’re a property “flipper”, then none of this probably matters. The IRS will generally treat your real estate as merchandise inventory, anyway.

By the way, if you ARE an active property manager, and need a new vehicle or such, consider the Section 179 deductions that are available for end-of-year purchases.

If you can accelerate any payments this week or defer any income into next month, now is the time to think about that. However, be careful of major repairs that may need to be capitalized and depreciated rather than expensed this year.

As always, I cannot stress too much that I’m NOT your tax or investment advisor. If you are active in the real estate investment arena, you really do need to have a good advisor helping you navigate the shoal waters of tax filings.

Early next month, I’ll do a year-end recap of the performance of various property sectors. Here’s a sneak peek — everything’s up, across the board, including laggards such as lodging and health care. Most sectors had a terrible 2020, and so the star performers this year were generally the ones that did the worst last year. The best two-year holds, however, have been industrial, self-storage, and data centers. More on this in January.

Finally, now is a great time to view your overall investment situation. I’ve always posited that real estate is an important component of a well-diversified portfolio, so how does that diversification mix change going forward? If you and your advisors think you need to make some changes, consider the tax implications of sales/swaps now versus January.

Best wishes for a great holiday season, and we’ll see you next year!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

December 22, 2021 at 4:39 pm

Posted in Uncategorized

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