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Most CPAs just handle the books and prepare tax returns. But we kept meeting people who had great investment opportunities. And people who had the ability to help them thrive and grow. It only made sense to bring those people together.

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Frequently Asked Questions

How does the home office deduction work?

Taxpayers who use a portion of their home exclusively and regularly for business purposes can deduct related expenses from their taxable income.

This deduction can be claimed two ways:

1. Simplified Method: Taxpayers can claim a standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet, resulting in a maximum deduction of $1,500.

2. Regular Method: Taxpayers calculate the actual expenses of their home office, including mortgage interest, insurance, utilities, repairs, and depreciation. These expenses are then prorated based on the percentage of the home used for business.

To qualify, the home office must be the principal place of business, used exclusively and regularly for business, and meet certain IRS requirements. The deduction is available to both self-employed individuals and employees, though employees must meet additional criteria.

What is a Real Estate Professional?

Someone who meets specific criteria under the tax law for purposes of qualifying for certain tax benefits, such as the ability to deduct real estate losses against non-passive income.

The IRS requires a taxpayer to satisfy the following requirements to be considered a real estate professional:

1. Material Participation Test: The taxpayer must materially participate in real estate activities. Material participation generally means involvement in the operations of the activity on a regular, continuous, and substantial basis.

2. 750-Hour Rule: The taxpayer must spend more than 750 hours during the tax year in real estate trades or businesses in which they materially participate. This includes activities like property development, construction, acquisition, conversion, rental, operation, management, leasing, or brokerage.

3. More Than Half of Personal Services: More than half of the personal services the taxpayer performs in all trades or businesses during the tax year must be in real estate trades or businesses in which they materially participate.

Both requirements must be met for each tax year for the taxpayer to qualify as a real estate professional. Meeting these criteria allows the taxpayer to treat rental real estate activities as non-passive, enabling them to potentially deduct losses against other types of income.

How does being a Real Estate Professional lower my tax bill?

By allowing you to deduct real estate losses against your non-passive income, such as wages, salaries, and other active business income.

Here’s how this works:

1.  Deduction of Rental Losses: Generally, rental real estate activities are considered passive activities, and losses from passive activities can only be deducted against passive income. However, if you qualify as a real estate professional, your rental real estate activities are not considered passive. This means you can deduct any rental losses against your other active income, reducing your overall taxable income.

2.  Unlimited Loss Deductions: Unlike non-professional real estate investors who are typically subject to a $25,000 limit on rental loss deductions (which phases out for high-income earners), real estate professionals can deduct unlimited rental losses, provided they materially participate in the rental activities.

3.  Depreciation and Other Expenses: As a real estate professional, you can deduct expenses related to your real estate activities, including mortgage interest, property taxes, repairs, maintenance, and depreciation. These deductions reduce your taxable income.

4.  Active Participation Credit: Even if you don’t meet the full requirements to be a real estate professional, active participation in rental real estate can allow you to deduct up to $25,000 of rental real estate losses against non-passive income if your modified adjusted gross income (MAGI) is $100,000 or less, with a phase-out up to $150,000.

By qualifying as a real estate professional, you can effectively use your real estate losses to offset other types of income, potentially leading to significant tax savings. It’s important to keep detailed records of your time and activities to substantiate your real estate professional status to the IRS.

What is a Cost Segregation Study and how does it benefit me?

Identify and reclassify personal property assets from real property assets to accelerate depreciation deductions.

This study dissects the costs associated with a real estate purchase or improvement, categorizing them into different asset classes with shorter depreciable lives. Here’s how it works and the benefits it offers:

How it works

  1. Detailed Analysis: Engineers and tax professionals analyze the components and associated costs of a property, identifying items that can be classified as personal property or land improvements.
  2. Reclassification: Items such as carpeting, cabinetry, lighting, and certain land improvements (e.g., parking lots, landscaping) are reclassified from 27.5- or 39-year property to shorter-lived assets, typically 5, 7, or 15 years.
  3. Documentation: A detailed report is created, documenting the reclassified assets and their corresponding depreciation schedules.

Benefits 

  1. Accelerated Depreciation: By reclassifying certain components to shorter depreciation periods, you can claim higher depreciation expenses in the earlier years of property ownership, reducing taxable income.
  2. Increased Cash Flow: Higher depreciation deductions in the initial years lower your tax liability, freeing up cash that can be reinvested into your business or other investments.
  3. Tax Deferral: Accelerating depreciation allows you to defer taxes, effectively postponing tax payments to future years, which can be particularly advantageous if you expect to be in a lower tax bracket later.
  4. Enhanced ROI: Improved cash flow and reduced tax liability can enhance the overall return on investment (ROI) for your property.
  5. Immediate Benefits with Bonus Depreciation: Under current tax law (as of 2024), bonus depreciation allows for immediate expensing of a significant portion of qualified property, amplifying the benefits of a cost segregation study.

Example

Consider a commercial building purchased for $1 million. Without cost segregation, you might depreciate the entire building over 39 years. However, a cost segregation study might identify $200,000 of the building’s cost as 5-year property, $100,000 as 7-year property, and $50,000 as 15-year property. This reclassification allows you to accelerate depreciation on $350,000 of the purchase price, significantly increasing your depreciation deductions in the early years.

By leveraging a cost segregation study, you can maximize depreciation benefits, improve cash flow, and enhance the financial performance of your real estate investments.

What is the Augusta Rule?

Formally known as IRS Section 280A(g), allows homeowners to rent out their personal residence for up to 14 days per year without having to report the rental income.

This rule was originally enacted to benefit homeowners in Augusta, Georgia, who rented out their homes during the Masters Golf Tournament, but it applies to anyone in the United States. 

How the Augusta Rule Works

  1. 14-Day Rental Exemption: You can rent out your personal residence for up to 14 days in a calendar year without having to report the rental income on your tax return.
  2. No Income Reporting: The rental income received during this period is entirely tax-free and does not need to be reported to the IRS.
  3. Expense Deduction Limitation: Since the income is not reported, you cannot deduct any rental expenses associated with these 14 days. However, you can still deduct mortgage interest and property taxes as itemized deductions.

How to Use the Augusta Rule

  1. Rent Your Home: Identify opportunities to rent your home for short-term events or to businesses. This can include renting for local events, meetings, or even corporate retreats.
  2. Set a Fair Rental Rate: Determine a fair market rental rate for your home based on comparable rentals in your area. Document this rate to ensure you are charging a reasonable amount.
  3. Document the Rental: Keep detailed records of the rental period, including dates, rental agreements, and the amount charged. This documentation will support your compliance with the rule.
  4. Stay Within 14 Days: Ensure that the total number of rental days does not exceed 14 in a calendar year. Renting for even one additional day will require you to report all rental income and expenses for the entire year.

Example

Suppose you own a home in a city that hosts a major annual event, such as a festival or sports tournament. You rent your home for 10 days during this event for $1,000 per day, earning a total of $10,000. Under the Augusta Rule, you do not have to report this $10,000 as rental income on your tax return, and it is entirely tax-free. However, you cannot deduct any rental-related expenses for those 10 days.

How do I determine my cash of cash return for a rental property?

The cash-on-cash return (CoC) measures the annual return made on a rental property relative to the amount of cash invested.

It’s a straightforward way to assess the profitability of a rental property based on the actual cash flow generated. 

Calculate Cash-on-Cash Return

  1. Calculate Annual Cash Flow:
    • Gross Rental Income: Total rental income received annually.
    • Operating Expenses: Total annual expenses for operating the property (property management fees, maintenance, insurance, property taxes, utilities, etc.).
    • Net Operating Income (NOI): Gross Rental Income – Operating Expenses.
    • Debt Service: Annual mortgage payments (principal and interest).
    • Annual Cash Flow: NOI – Debt Service.
  2. Determine Total Cash Invested:
    • Down Payment: The initial payment made when purchasing the property.
    • Closing Costs: Fees and costs associated with closing the purchase.
    • Renovation Costs: Any costs incurred to get the property ready for rent.
    • Other Initial Costs: Any additional costs required to make the property operational.
  3. Calculate Cash-on-Cash Return:
    • Formula: Cash-on-Cash Return = (Annual Cash Flow/Total Cash Invested)×100

Example Calculation

Annual Cash Flow:

  • Gross Rental Income: $2,000 per month x 12 months = $24,000
  • Operating Expenses: $8,000 annually (including property management, maintenance, insurance, taxes, utilities)
  • NOI: $24,000 – $8,000 = $16,000
  • Debt Service: $1,000 per month x 12 months = $12,000
  • Annual Cash Flow: $16,000 – $12,000 = $4,000

Total Cash Invested:

  • Down Payment: $50,000
  • Closing Costs: $3,000
  • Renovation Costs: $7,000
  • Total Cash Invested: $50,000 + $3,000 + $7,000 = $60,000

Cash-on-Cash Return:

Cash-on-Cash Return = $4,000 / $60,000 X 100 = 6.67%

Interpretation

A 6.67% cash-on-cash return means that for every dollar you invested in the property, you are earning 6.67 cents annually in cash flow. This metric helps investors compare the profitability of different rental properties or investment opportunities based on actual cash income generated relative to the cash invested.

How do I find good real estate investment deals?

Finding good real estate investment deals involves a combination of research, networking, and due diligence.

Here are some strategies to help you identify profitable opportunities:

1. Define Your Investment Criteria

  • Location: Decide on the geographic area you want to invest in. Look for areas with strong rental demand, growth potential, and economic stability.
  • Property Type: Determine whether you’re interested in single-family homes, multifamily properties, commercial real estate, or other types.
  • Budget: Establish your investment budget, including how much you’re willing to spend on the purchase price, renovations, and ongoing expenses.
  • Expected Returns: Define your target return on investment (ROI) and other financial metrics like cash-on-cash return or cap rate.

2. Research the Market

  • Online Listings: Use real estate websites like Zillow, Realtor.com, Redfin, and LoopNet to search for properties that meet your criteria.
  • MLS Access: Get access to the Multiple Listing Service (MLS) through a real estate agent. The MLS provides comprehensive and up-to-date property listings.
  • Foreclosures and Auctions: Look for foreclosed properties and auction listings, which can often be purchased below market value.
  • Public Records: Check public records for distressed properties, tax lien sales, and other opportunities.

3. Network with Industry Professionals

  • Real Estate Agents: Build relationships with agents who specialize in investment properties. They often have access to off-market deals and insider knowledge.
  • Real Estate Investors: Join local real estate investment groups, attend meetups, and participate in online forums to connect with experienced investors.
  • Wholesalers: Work with wholesalers who specialize in finding and contracting properties to sell to investors at a discount.

4. Analyze Potential Deals

  • Comparable Sales (Comps): Look at recent sales of similar properties in the area to determine fair market value.
  • Rental Market Analysis: Assess the rental market to estimate potential rental income and vacancy rates.
  • Financial Metrics: Calculate key financial metrics such as cap rate, cash-on-cash return, and internal rate of return (IRR) to evaluate profitability.
  • Property Condition: Inspect the property’s condition and estimate repair and renovation costs.

5. Perform Due Diligence

  • Property Inspection: Hire a professional inspector to evaluate the property’s condition and identify any potential issues.
  • Title Search: Conduct a title search to ensure there are no liens or legal issues associated with the property.
  • Environmental Assessment: For commercial properties or properties with potential environmental concerns, conduct an environmental assessment.

6. Utilize Real Estate Tools and Software

  • Property Analysis Software: Use tools like PropStream, Realeflow, or DealCheck to analyze properties and streamline your investment process.
  • Market Data Platforms: Use platforms like CoStar, REIS, and CoreLogic for in-depth market data and analysis.

7. Stay Informed

  • Industry News: Follow real estate news, trends, and market reports from sources like the National Association of Realtors (NAR), Real Estate Investment Trusts (REITs), and financial news websites.
  • Economic Indicators: Monitor economic indicators such as interest rates, employment rates, and local economic developments that can impact the real estate market.

By combining these strategies, you can systematically search for and evaluate real estate investment opportunities that align with your goals and risk tolerance. Remember, successful investing requires patience, persistence, and thorough analysis.

How do I remove myself from the day to day operations of my business?

Removing yourself from the day-to-day operations of your business requires strategic planning and the implementation of systems and processes that ensure the business can run smoothly without your constant involvement.

Here are the steps to achieve this:

1. Delegate Responsibilities

  • Identify Key Roles: Determine which tasks and responsibilities you handle that need to be delegated.
  • Hire or Promote Employees: Find capable employees or hire new staff to take on these roles. Ensure they have the skills and experience needed.
  • Define Clear Roles and Responsibilities: Clearly outline what each team member is responsible for and ensure there is no overlap or confusion.

2. Develop and Document Processes

  • Standard Operating Procedures (SOPs): Create detailed SOPs for all critical tasks and processes in your business. This documentation will serve as a guide for employees to follow.
  • Training Programs: Develop comprehensive training programs to ensure employees are well-equipped to perform their roles effectively.

3. Implement Management Systems

  • Project Management Tools: Use tools like Asana, Trello, or Monday.com to manage tasks and projects, allowing you to monitor progress without being directly involved.
  • Customer Relationship Management (CRM): Implement a CRM system to manage customer interactions, sales processes, and customer service.
  • Financial Management Software: Use accounting software like QuickBooks or Xero to keep track of finances and generate reports automatically.

4. Empower and Trust Your Team

  • Delegate Authority: Empower your team to make decisions within their areas of responsibility. This builds their confidence and reduces the need for your constant input.
  • Encourage Ownership: Foster a culture of ownership and accountability, where employees feel responsible for the success of their tasks and the business as a whole.

5. Hire a Manager or COO

  • General Manager or Chief Operating Officer (COO): Consider hiring a GM or COO to oversee the day-to-day operations. This person should have strong leadership skills and experience in your industry.
  • Clear Reporting Structure: Ensure that the manager or COO has a clear understanding of their role and how they will report to you.

6. Set Up Regular Check-Ins and Reports

  • Regular Meetings: Schedule regular check-ins with your management team to stay updated on business operations and address any issues.
  • Performance Reports: Establish a system for generating regular performance reports on key metrics and KPIs. This allows you to monitor the business’s health without being involved in daily activities.

7. Automate Where Possible

  • Automate Routine Tasks: Identify tasks that can be automated using technology, such as email marketing, invoicing, and payroll.
  • Use AI and Software: Implement AI tools and software that can handle customer inquiries, manage inventory, and perform data analysis.

8. Plan for Emergencies

  • Crisis Management Plan: Develop a plan for handling emergencies and unexpected situations. Ensure your team knows what to do in your absence.
  • Succession Planning: Have a succession plan in place for key roles to ensure business continuity.

9. Gradually Step Back

  • Test the Waters: Gradually reduce your involvement to see how the business operates without you. Start by taking short breaks or delegating specific tasks.
  • Evaluate and Adjust: Monitor the results and make adjustments as necessary. Ensure the business continues to run smoothly and efficiently.

By following these steps, you can systematically remove yourself from the day-to-day operations of your business, allowing you to focus on strategic growth, new opportunities, or simply enjoying more personal time.

What are the tax return deadlines?

The corporate and personal tax deadlines in the United States vary depending on the type of business entity and the individual taxpayer’s circumstances.

Here are the key tax deadlines for the 2024 tax year:

Corporate Tax Deadlines

  1. C Corporations (Calendar Year):
    • Tax Return Due Date: April 15, 2024 (Form 1120).
    • Extended Tax Return Due Date: October 15, 2024 (if an extension is filed using Form 7004).
  2. S Corporations:
    • Tax Return Due Date: March 15, 2024 (Form 1120S).
    • Extended Tax Return Due Date: September 16, 2024 (if an extension is filed using Form 7004).
  3. Partnerships:
    • Tax Return Due Date: March 15, 2024 (Form 1065).
    • Extended Tax Return Due Date: September 16, 2024 (if an extension is filed using Form 7004).
  4. Limited Liability Companies (LLCs):
    • The deadline depends on how the LLC is taxed (as a corporation, partnership, or disregarded entity). Follow the relevant deadlines above.

Personal Tax Deadlines

  1. Individual Taxpayers:
    • Tax Return Due Date: April 15, 2024 (Form 1040).
    • Extended Tax Return Due Date: October 15, 2024 (if an extension is filed using Form 4868).
  2. Estimated Tax Payments:
    • First Quarter: April 15, 2024.
    • Second Quarter: June 17, 2024.
    • Third Quarter: September 16, 2024.
    • Fourth Quarter: January 15, 2025.

Special Deadlines

  1. Corporations with Fiscal Year Endings:
    • If a corporation’s fiscal year ends on a date other than December 31, the tax return is due on the 15th day of the fourth month after the fiscal year-end.
  2. Non-Resident Aliens:
    • Tax Return Due Date: June 17, 2024 (Form 1040NR).
    • Extended Tax Return Due Date: December 16, 2024 (if an extension is filed using Form 4868).
  3. Trusts and Estates:
    • Tax Return Due Date: April 15, 2024 (Form 1041).
    • Extended Tax Return Due Date: October 15, 2024 (if an extension is filed using Form 7004).

Important Notes

  • If a deadline falls on a weekend or legal holiday, the due date is typically the next business day.
  • Filing an extension allows for extra time to file the tax return but does not extend the time to pay any taxes due. Penalties and interest may apply to any unpaid taxes after the original due date.

It is crucial to stay aware of these deadlines and to file any necessary forms on time to avoid penalties and interest. For specific advice tailored to your situation, consulting with a tax professional is recommended.