WASHINGTON, D.C. – April 14, 2015 – (RealEstateRama) — Once again tax day has rolled around, and many commercial real estate investors wonder if their tax bill was higher than necessary for 2014. For a happier April 15, 2016, tax attorney and real estate broker Mark Levine, CCIM, PhD, JD, LLM (Tax), has advice on ways commercial real estate pros – and their clients – can save money on taxes throughout 2015.
“For Certified Commercial Investment Members, or CCIMs, it’s all about learning and applying how to legally minimize taxes,” says Levine, best-selling author and University of Denver professor. “The biggest issue for our clients and ourselves is to plan ahead for the best tax position because the night of April 14 is too late.”
CCIMs are trained experts in commercial real estate investment. Levine recently developed and taught a course on real estate tax updates for the CCIM Institute’s Ward Center for Real Estate Studies, which offers commercial real estate continuing education courses.
For those who are adept at closing deals and making money but not at saving tax dollars, Levine has seven simple strategies that can change taxes for CRE investors in 2015. This advice requires consistent attention but can fit into every busy commercial real estate investors’ schedule through practice and patience.
- Maximize deductions and depreciations. Levine’s golden tax rule is for commercial real estate professionals to stay on top of all IRS rules and changes that boost their clients’ pocketbooks. Being aware of key deductions, such depreciation changes, is critical.
- Aim for exclusions. For example, advise clients that gifts to anyone are not subject to income tax. And they are not subject to gift tax – if they do not exceed the annual exclusion of $14,000.
- Defer income and accelerate deductions. Property sellers can defer income by using deferral techniques, such as an installment sale. Under this scenario, part of the sale can be recorded during the year of the sale, and a portion of the taxable gain can be directed toward income in future years.
- Use tax-deferred exchanges. Internal Revenue Code Section 1031 exchanges permit the deferral of capital gains/Section 1231 gains if the taxpayer fulfills the 1031 requirements and transacts both a qualified sale and purchase within the limits in the Code, which generally provides for a 180-day time frame for the transactions.
- Characterize income as capital gain instead of ordinary income. Under the Code and IRS guidelines, there are instances where income can be defined as long-term capital gain instead of ordinary income. The difference in tax rates can be substantial. For example, ordinary income can be taxed at up to 39.6 percent (with even some additions), whereas capital gains are taxed, generally, on the high side at 15 percent or 20 percent, depending on the income of an individual and other rules, such as recapture.
- Obtain tax credits versus tax deductions. Tax credits directly reduce tax bills dollar for dollar, while tax deductions lower the tax bill but only in relation to the tax rate of the taxpayer.
- Establish a miscellaneous category. Levine says some tax issues defy the other six buckets and come up only occasionally. Consider, for example, the area of passive losses or the new net investment income tax (Medicare tax). If individuals do not know the rules, they should hire an expert to advise them.
“Every day, I hear about cases where a few hours of planning could have made a big difference to owners and businesses,” says Levine, who co-wrote with his daughter, Libbi Levine Segev, Esq., what’s been described as the bible on real estate deals — Real EstateTransactions, Tax Planning — in its 42nd year, with annual revisions.
“For instance, four brothers owned a ski resort together, and one of them died without a will. The result was terrible financial uncertainty about the future of the ski resort. This would have been so easy to fix before the brother’s death.”
Planning ahead to maximize tax deductions, tax deferrals, and tax credits takes a little more time but typically adds up to significant savings on April 15