Tax Breaks for Becoming a Landlord

Rental Property

Have you always wanted to buy rental property and become a landlord?

As you can imagine, putting up with some tenants can be a pain in the neck. But the discomfort can be eased by the valuable tax breaks available to rental property owners. In fact, favorable tax laws are one big reason why so many fortunes have been made in real estate. Another big reason is that leveraging real estate investments with mortgages can multiply profits.

But for purposes of this article, let’s stick to taxes. Here are some important things landlords should know:

What Can You Write Off?

Of course, you can deduct mortgage interest and real estate taxes on rental properties. However, if you pay mortgage points, you must amortize them over the term of the loan (unlike points on a mortgage to purchase a principal residence, which can be deducted immediately).

In addition, you can write off all the other operating expenses — such as utilities, insurance, homeowner association fees, repairs, maintenance and yard care.

One of the best tax breaks is the fact that you can depreciate the cost of residential buildings over 27.5 years, even while they are (hopefully) increasing in value. Let’s say you purchased a rental property (not including the land) for $100,000. The annual depreciation deduction is $3,636, which means you can have that much in positive cash flow without owing any income taxes. That’s pretty valuable, especially if you own several properties. Commercial buildings must be depreciated over a much longer time (39 years), but the write-offs still shelter some cash flow from taxes.

Beware of the Passive Loss Rules

Rental property ownership gets complicated if your property throws off a tax loss — and most do at least during the early years. The so-called passive activity loss (PAL) rules will probably apply.

The fundamental concept: You can only deduct passive losses to the extent of passive income from other sources — such as positive operating income from other rental properties or gains from selling them.

Fortunately a special exception says you can generally deduct up to $25,000 in passive losses from rental real estate so long as:

  1. Your adjusted gross income (AGI) before the real estate losses is under $100,000.
  2. You “actively participate” in the rental activity. Active participation means owning a 10% or greater stake in the property and being energetic enough to at least make management decisions like approving tenants, signing leases, and authorizing repairs. In other words, you don’t have to mow the lawn and snake out the drains yourself to pass the test. But if you use a management company to handle all the details, you can forget about taking advantage of the $25,000 exception.

If your AGI is between $100,000 and $150,000, the exception is phased out pro-rata. So an AGI of $125,000 means you can deduct up to $12,500 in passive real estate losses (half of the $25,000 maximum) even if you have zero passive income.

Important Exceptions to the PAL Rules

First: If your property is in a resort area, the average rental period may be seven days or less. In this case, the IRS considers you to be running a business rather than a rental operation. Now, if you “materially participate” in running this “business,” you’re exempt from the PAL rules and can deduct your losses currently.

So what does it take to materially participate? In a nutshell, you must either spend:

  • More than 500 hours annually taking care of the property or
  • More than 100 hours with no one else spending more time than you do.

Remember, this material participation exception applies only if the average rental period is seven days or less. If you use a management company, you will probably fail to meet the participation guidelines.

Second: There’s yet another PAL exception that applies only to people who have become heavily involved in real estate. To take advantage, you must spend more than 750 hours annually in real estate activities that in which you materially participate. And those hours must involve more than 50% of the time you spend working for a living. There are some other hurdles, but if you clear them, you’ll be exempt from the PAL rules and therefore be able to currently deduct your rental losses.

Bottom line: Rental property owners have to watch their AGIs carefully. Every $2 over the $100,000 threshold costs a dollar in current passive loss deductions. For example, say your AGI is shaping up to be right around the $100,000 borderline. You might want to consider planning moves that will reduce your AGI this year, or at least not cause it to go up. Selling some loser stocks or mutual funds could be a really good idea, while selling some winners may only make Uncle Sam happy.

If your AGI is above $150,000 and you have no passive income, you generally cannot currently deduct a rental real estate loss. However, your loss carries over to future tax years. You will eventually be able deduct your carryover losses when you either sell the property or generate some passive income. All in all, this is not a bad outcome as long as you just have “paper losses” caused by your depreciation write-offs.

What If You Have Income?

Eventually, your rental properties should start throwing off positive taxable income instead of losses because rents surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up some carryover passive losses in earlier years, you now get to use them to offset your profits. So you may not actually owe any extra taxes for a while.

Another benefit: Positive taxable income from rental real estate is not hit with self-employment (SE) tax, which applies to most other profit-making ventures other than working as an employee and investing. Depending on your situation, the SE tax can be either 15.3% or 2.9%. In either case, it’s beneficial when you don’t have to pay it.

As you can see, the tax rules for rental real estate are pretty favorable. Your tax advisor can provide more information about your situation

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© 2019, Provided by Thomson Rueters Checkpoint

Tom Kennedy, CPA has been admitted to the partnership

Thomas P. Kennedy
FOR IMMEDIATE RELEASE

Thomas P. Kennedy

Newburgh, NY – RBT CPAs, LLP, takes great pleasure in announcing that Tom Kennedy, CPA has been admitted to the partnership. Tom officially became a partner on May 24, 2019 and will serve in the Audit Department.  He comes to us with over 25 years of experience serving clients in the healthcare, not-for-profit and governmental industries including hospitals, HMOs, nursing homes, physician groups, FQHCs, religious orders, voluntary health and welfare organizations, arts and educational institutions, foundations and local and county governments.

Tom was a partner with a top 50 CPA firm, where he also served as co-managing partner and head of business development for their Mid-Hudson Valley office. Tom has also spent time in the private sector, serving as Vice President of Finance for a Manhattan based health system and overseeing operations for the managed care organization for three health plans.

Tom is active in the community, recently completing a nine-year term as a Trustee and Chairman of the Finance, Audit and Compensation Committees for the Montefiore St. Luke’s Cornwall Hospital where he assisted in the integration of the community based hospital into the Montefiore Health System. Tom serves as a Board Member of the Orange County Cerebral Palsy Association, and is a member of the Finance Committee of the Mohonk Land Preserve. Tom served on other boards in leadership roles including the Orange County Partnership, the Orange County Arts Council and the Greater Newburgh Symphony Orchestra.

Tom is a member of the AICPA and the NYSSCPA where he served as a Board Member of the Hudson Valley Chapter and the Healthcare Committee. Tom is a graduate of Leadership Westchester and resides in Highland Mills, NY with his wife, Marianna, and their son, Ryan.

RBT CPAs, LLP have offices located at 11 Racquet Road, Newburgh, NY, 2678 South Road, Poughkeepsie, NY and 51 Sullivan Street, Wurtsboro, NY.  We provide accounting, auditing, tax and business consulting services to clients in the greater Hudson Valley, as well as in other areas of New York State, Connecticut and New Jersey.

Age Has its Privileges … and Penalties

Birthday Cake

In an era filled with uncertainty, you can count on one thing: time marches on.

Here are some important age-related financial and tax milestones to keep in mind for you and your loved ones:

Age 0 to 23

Under the Kiddie Tax rules, part of young person’s investment income can be taxed at the parent’s federal rate which can be as high as 37% for 2019 (and 2018) rather than at the young person’s lower rate (usually only 10% or 12% depending on the type of income).

The Kiddie Tax can bite until the year when the young person turns 24. However, after the year the individual turns 18, it can only bite if he or she is a student with at least five months of full-time school attendance. For 2019 (and 2018), the Kiddie Tax can only hit investment income in excess of the threshold amount of $2,200. Investment income below the threshold is taxed at the young person’s lower rate.

Age 18 or 21

Did you set up a custodial account for your minor child to help pay for college or save on taxes? It will come under the child’s control when he or she reaches the local age of majority (generally, age 18 or 21 depending on your state of residence).

Age 30

If you set up a Coverdell Education Savings Account (CESA) for a child or grandchild, it must be liquidated within 30 days after he or she turns 30 years old. Earnings included in a distribution that are not used for qualified education expenses are subject to federal income tax, plus a 10% penalty. Alternatively, the Coverdell account balance can be rolled over tax-free into another CESA set up for a younger family member.

Age 50

At this age, you can begin saving more for retirement on a tax-favored basis. If you’re age 50 or older as of the end of the year, you can make an additional catch-up contribution to your 401(k) plan, 403(b) plan, Section 457 plan, or SIMPLE plan, assuming the plan permits catch-up contributions. You can also make an additional catch-up contribution to a traditional or Roth IRA.

Age 55

If you permanently leave your job for any reason, you can receive distributions from the former employer’s qualified retirement plans without being hit with the 10% premature withdrawal penalty tax. This is an exception to the general rule that a 10% penalty is due on distributions received before age 59 1/2.

Age 59 1/2

For any reason, you can receive distributions at age 59 1/2 from all types of tax-favored retirement plans and accounts without being hit with the 10% premature withdrawal penalty tax. This includes IRAs, 401(k) plans, pensions and tax-deferred annuities.

Age 62

At this age, you can elect to start receiving Social Security benefits. However, your benefits will be lower than if you wait until reaching full retirement age (see “Age 66” below). When considering this election, look at your health and your family’s history of longevity.

Also, if you continue working after starting to collect benefits but before reaching full retirement age, your Social Security benefits will be further reduced if your income from working exceeds $17,640 in 2019 (up from $17,040 in 2018).

Age 66

After years of paying into the system, you can start receiving full Social Security benefits. However, the age to collect full benefits is creeping upward. For example, if you were born between 1943 and 1954, it’s 66. And if you were born in 1960 or later, you will have to wait until age 67 to collect full benefits. If you reach age 66 in 2019, your benefits will be reduced if you are still working and your earnings exceed $46,920 (up from $45,360 in 2018).

Want to keep working? You won’t lose any benefits if you work in years after the year you reach full retirement age, regardless of how much money you make.

Age 70

You can choose to postpone receiving Social Security benefits until after you reach age 70. If you make this choice, your benefit payments will be more than if you had started receiving them earlier. They will be increased by a certain percentage (depending on your date of birth).

Important: If you decide to delay retirement, be sure to sign up for Medicare at age 65. In some cases, medical insurance costs more if you delay applying for it.

Age 70 1/2

You generally must begin taking annual minimum required distributions from tax-favored retirement accounts (including traditional IRAs, SEP accounts and 401(k) accounts), and pay the resulting income taxes. However, you need not take any such mandatory distributions from your Roth IRA.

The initial minimum required distribution is for the year you turn 70 1/2, but you can postpone taking that payout until as late as April 1st of the following year. If you chose that option, however, you must take two minimum required distributions in that following year. One must be taken by April 1st, which is the one for the previous year, plus another by December 31st, which is the one for the current year. For each subsequent year, you must take your minimum required distribution by December 31st.

There’s one exception: if you’re still working after reaching age 70 1/2, and you don’t own over 5% of the company, you can postpone taking any minimum required distributions from the employer’s plan(s) until after you’ve retired.

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© 2019, Provided by Thomson Rueters Checkpoint

Why Business Owners Don’t Plan for Succession … and Why it’s Critical

Hands Holding Key

Many business owners procrastinate putting a well-conceived succession plan in place.

The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Here are five of the top reasons why business owners don’t have an exit strategy, along with the reasons why it’s best to make a proactive plan.

Reason number 1: No time

Business owners are busy with the day-to-day tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done … later.

Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And in a worst case scenario, “later” may never come. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.

Reason number 2: Loss of control

In some cases, business owners may not want to stop working for the companies they spent years building. Giving up control is difficult. Owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.

Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success. In other words, a proactive approach brings more control over the end result.

Reason number 3: Ignoring tax issues because they’re complex

There are obviously a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell (federal tax capital gains rates may increase in the future). The tax implications of a sale or transfer can be extremely complex.

Why it’s best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn’t structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run — not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax advisor well in advance of the actual sale.

Reason number 4: Not sure who is going to take over

For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?

In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the “heir to the throne” have the business skills to succeed? Will a formal succession plan cause family conflict?

Without all the answers, a business owner may do nothing.

Why this is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You can sell outright, sell to your children, gift interests to family members at a low tax cost — and more. But if you don’t explore the possibilities, you leave the outcome to chance.

Reason number 5: Not enough retirement savings

While building their businesses, many owners put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement — especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.

Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.

These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Start well in advance. Assemble an advisory team that includes your corporate attorney, accountant, estate advisor and other professionals.

And if transfer your business to your children, urge the next generation to start thinking about their succession plans.

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© 2019, Provided by Thomson Rueters Checkpoint

Tax Planning for Investments Gets More Complicated

For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends.

For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate.

Old rules

For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets.

Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.

In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends.

New rules

The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets. Here are the 2018 brackets:

  • Singles:

0%: $0 – $38,600
15%: $38,601 – $425,800
20%: $425,801 and up

  • Heads of households:

0%: $0 – $51,700
15%: $51,701 – $452,400
20%: $452,401 and up

  • Married couples filing jointly:

0%: $0 – $77,200
15%: $77,201 – $479,000
20%: $479,001 and up

For 2018, the top ordinary-income rate of 37%, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds.

More thresholds, more complexity

With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact us.

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© 2019, Provided by Thomson Rueters Checkpoint

Jolene Borell, CPA and Shannon Mannese, CPA, CFE have been admitted to the partnership

FOR IMMEDIATE RELEASE

Jolene Borell, CPA

Newburgh, NY – RBT CPAs, LLP, takes great pleasure in announcing that Jolene Borell, CPA has been admitted to the partnership. Jolene officially became a partner on January 1, 2019. She joined the firm of RBT CPAs in December, 2004 and quickly climbed to the top. She currently works in the Newburgh office in the Client Service Department. She is an active member of her community and recently graduated from the Pattern for Progress Fellows Program. She is also an active member of the NYSSCPAs and the AICPA.  Jolene resides in Montgomery, NY with her husband and 2 children.  Managing Partner, Mike Turturro adds, “We are so very pleased and honored to welcome Jolene to our Partner group. She is a crucial part of our Client Service Department and has proven to be a key player in our continued growth. We are all proud of you! Congratulations and many years of continued success!”

FOR IMMEDIATE RELEASE

Newburgh, NY – RBT CPAs, LLP, takes great pleasure in announcing that Shannon Mannese, CPA, CFE has been admitted to the partnership. Shannon officially became a partner on January 1, 2019.  She joined the firm of RBT CPAs in 2004. She currently works in the Newburgh office in the Audit Department. She is an active member of her community, most recently serving on the Grant Review Committee for the United Way. She is also an active member of the NYSSCPAs and the AICPA.  Shannon resides in Milton, NY with her twin boys.  Managing Partner, Mike Turturro adds, “We are so excited to welcome Shannon to our Partner group! Shannon has been a crucial part of our Audit Department and a key player in our continued growth. She is a dedicated team member and a hard worker and sets that example every day for her team! Congratulations and many years of continued success!”

It Pays to Hire Vets

As Veterans Day 2018 concludes, I am reminded that it has been fifteen long years since the US led coalition crossed over the Kuwaiti border, marched, rode and flew into Iraq to begin extended military operations in the Middle East. This campaign has produced nearly a generation of war-time Veterans, distinguished with their own distinct strengths and struggles, opportunities and obstacles.

Every year thousands of these brave men and women make the transition back to civilian life, in search of their earned share of The American Dream. The State and Federal governments recognize the need to help our Veterans find pathways to purposeful careers and have established lucrative tax credits for employers to train, hire and retain prior active duty servicemen and women.Continue reading

Mike Turturro: Don’t Kid Around about Kiddie Tax Changes

As a taxpayer, if you have a child or young adult living in your home for more than half a year who does not provide for more than half of their own support, does not file a tax return jointly, and one or both parents are alive, taxpayers are accustomed to having a child tax credit available.  However, it is important to be aware that as the same Kidde Tax rules apply as before, the Kiddie Tax rate structure has changed.  The new tax structure change can make a significant difference in the amount of tax that may be owed and one should prepare ahead to understand how to help reduce the Kiddie Tax impact.  It is no laughing matter as the new rates can be unfavorable, costing more.Continue reading

Doing Business In Other States Just got more Complicated…

On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc., et al, the highly anticipated challenge to the sales tax physical presence standard adopted through Quill v. North Dakota in 1992. Accordingly, the Court has overruled the Quill physical presence standard allowing states to impose economic sales tax nexus standards on remote sellers.

Writing for the majority, Justice Kennedy, who also sat on the Quill court in 1992, noted that the Quill physical presence rule was no longer appropriate for, nor could it have anticipated, the modern e-commerce economy. Finally, it was noted that most of the states had requested the Court overturn Quill, stating that it was “essential to public confidence in the tax system” that the Court avoid creating an unfair burden shift in tax collection to in-state retailers.Continue reading

2018 Accounting Today’s Best Accounting Firms to Work For

FOR IMMEDIATE RELEASE

Michael-A-Turturro-CPA

RBT CPAs, LLP, was recently named as one of the 2018 Accounting Today’s Best Accounting Firms to Work for. Accounting Today has partnered with Best Companies Group to identify companies that have excelled in creating quality workplaces for employees. Last year, RBT CPAs, LLP, was ranked number 34 out of the top 100 companies to work for and look forward to finding out their ranking this year.  The ranking will take place in November.

“I am so proud of our firm to have received this achievement again this year. As Managing Partner, I have learned that the success of a company depends not just on the vision or product, but the people who carry out the vision and build the product. I am honored to be part of such an amazing team of people. I cannot say enough for the work they do and the dedication they show to the mission and vision of our firm. On behalf of myself and our Partner group, I would like to thank my team for propelling us to this level of recognition once again.” – Michael Turturro, CPA, Managing Partner”

This survey and awards program is designed to identify, recognize and honor the best employers in the accounting profession, benefiting its economy, workforce and businesses. The list is made up of 100 firms.

To be considered for participation, firms had to fulfill the following eligibility requirements:

  • Must be an accounting firm.
  • Have a facility in the United States;
  • Have a minimum of 15 employees working in the United States;
  • Must be in business a minimum of 1 year

Firms from across the United States entered the two-part survey process to determine Accounting Today’s Best Accounting Firms to Work for. The first part consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. This part of the process was worth approximately 25% of the total evaluation. The second part consisted of an employee survey to measure the employee experience. This part of the process was worth approximately 75% of the total evaluation. The combined scores determined the top firms and the final ranking. Best Companies Group managed the overall registration and survey process, analyzed the data and determined the final ranking.

“The firms on this list represent the best workplaces in the accounting profession,” said Accounting Today Editor-in-Chief Daniel Hood. “They are outstanding places to build a career.”