Feb 13 2008
Hitting the Ceiling
Even after doing taxes for three years, something always manages to surprise me.
My meeting with TaxMan yesterday went well. My refund will be about 50% of what I anticipated. I’d be lying if I said I wasn’t disappointed. Don’t get me wrong: getting a refund is much better than owing. But I was expecting to get a lot more back.
It seems a ceiling exists as to how much I can deduct.
Legally.
Having two duplexes, renovations, and maintenance I have already hit that ceiling. TaxMan said the renovations from last years project would be treated as capitalized expense.
He assured me that somehow that is good for me. Next year.
While preparing to depart his office, we were talking about the housing market in general. When mentioning my desire to purchase an additional property, the conversation took a detour.
“Make sure you focus on cashflow for the next property. You won’t get any additional tax benefit from having a third property.”
A few years ago, this piece of advice would have been easily dismissed. Finding cashflowing property in California is nearly impossible. Break even was about the best you could hope for.
That is until 2008 rolled around . . .
The next hunt should prove to be interesting.
If you liked that post, then try these...
Too Good on November 17th, 2006
Prologue: Every morning, I read 12 different REI blogs.
Resident Search on May 8th, 2008
For Property #1, the front tenants have moved out.
If you were a “real estate professional” as defined by the IRS, you could deduct all your expenses in the year they occurred without limit. At least you don’t lose the deduction, it is just deferred.
However, your tax man is right. Don’t buy real estate unless it cash flows or it will cash flow as soon as you fix it up and put it into service. Real estate should be the investment that provides a steady stream of cash to support you. Otherwise you just have a very expensive hobby. This hobby could wipe you out financially if the economy goes south, your vacancy and collections go up, and you lose your job.
You haven’t mentioned any recent conversations with your mentor. If I were in your shoes with that kind of resource, I would have a long and detailed conversation about the importance of cash flow in real estate investing.
Welcome to my world. Last year we got sucked into the whole Alternative Minimum Tax clusterf#*% due to the rental market tanking.
Tax man is right. I would hold off or try to get a property that you KNOW will flow positive.
AI, that’s a good thought. I checked into that a few years back and there are some drawbacks. It may assist me at tax time but for financing properties it makes the situation worse.
My Mentor has been busy with his new business. While I’m sure he would make time for me, I decided to not to bring it up now. Besides, I’m taking a few months per everyone’s suggestion! But rest assured he’ll be the first person I contact when I decide to step up to the plate again.
Bruce, the TaxMan also advised me not to take too many deductions because there would be a giant red flag at IRS headquarters. I’m not sure if that’s what you are referring to but I think it is.
Yep, same thing happened to us. We’ve hit the limit on how many losses we could deduct in any given year for the past few years. :-/ We do carry them over from year to year, though. So, those past “losses” will offset profits we made this year. I’m hoping for the best, but I’m worried. We may show too much of a profit (’course, it’s all been spent now) from the sales of our properties this past year. I’m not 100% clear on this, but our CPA says we’re out of basis on our S-Corp (stupid way to hold real estate resulting from bad legal advice early on)–which means we can no longer show a loss–which means we may owe this year. Sonofa…. I’ve been holding all our recent acquisitions in a brand new LLC, which should solve this problem for the years to come. But, this year and next year may be a problem as we’re selling all the properties out of the S-Corp. Jeez, this sounds like it should be a blog post.
Trisha, the thought about having a corporation to put my properties in crossed my mind more than once. At the end of the day I decided to hold off until I was in a position to warrant one.
California is not corporation friendly. Just to incorporate is a yearly $800 fee. From there, the financial barriers to entry continue to grow.
In the end: yes it does sound like a great blog post.