Many real estate investors are not able to fully deduct paper or real losses because of the passive activity loss limitation rules. Your accountant never warns you. You just get surprised, and don't realize there is a way around the problem.
The subject is WAY too complicated for this one blog post. We have a DVD called Income Taxes for Real Estate Investors that covers the rules and the workarounds, along with a lot of other tax-saving topics.
The purpose of THIS post is to tell you about a handy little tool that can help a lot with the passive activity surprise.
One of the ways to get all of your deductions is to materially participate in the real estate activity. For people with day jobs, your accountant probably tells you that you cannot survive an IRS audit if you claim material participation. They are wrong. You just need to document your time, and spend more than 500 hours a year on your real estate activities. That's prospecting, due diligence, managing, self-education, document review, travel--pretty much anything at all related to your investments. It averages out to slightly less than 10 hours a week. Most investors I know spend at least 10 hours a week on their investments.
For most people, the problem is not an IRS audit. Very few people get picked for an audit. The problem is convincing your accountant to CLAIM all the deductions! You need to keep track of your time because of your accountant, not because of IRS audit fears.
Documenting your time is a pain-in-the-you-know-what unless you have help. THAT is the point of this blog post. I recommend a free app called Toggl. It is a time keeping app.
Using Toggl, I set up "projects" for different properties I already own or that I'm investigating. I also have a project called "General." That's the one I use for general education, like learning about IRS rules.
I then set up "tags" of activities, such as education, prospecting, due dligence, research, negotiations, inspections, rehab work, rehab supervision, etc.
When you head out the door to look at some properties, just activate your Toggl app, select the project and tag, and start the clock. Three clicks, total. When you are finished, stop the clock. If you forget, you can always go back and manually enter time.
Reports can be viewed easily on your phone, and can be downloaded on the Toggl.com website with the same user name and password as the app.
No more arguing, because you will have detailed time sheet reporting with NONE of the hassles!
Be sure to check this out, and let me know what you think.
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