On my Thursday Ask Christina First Radio Show I interviewed a guest who is a great example of both things I passionately teach about, small business and real estate investing.
Patricia Leung is a tax consultant who does small business taxes and specializes in real estate; she's a tax strategist who holds a Master's Degree in taxation. Pat's tax firm specializes in tax planning; she helps her clients do year-end planning to be in the best financial situation going into a new year. Pat's interest in taxes started when she came home from junior high school one day and noticed an error in her parents' taxes, which they'd paid to have professionally prepared. Displeased that her parents' taxes her done incorrectly she began to study IRS publications she obtained from her school library. After reading publication 17 and becoming amazed by the strategies tax payers could use. Pat got into real estate when she landed in Ernst and Young's real estate tax department and she transitioned to a real estate investment company that specialized in section 42 low-income housing.
I started investing in real estate when I was 17 and later I did a 1031 exchange going from a single family home to multi-unit. I still use the CPA my mom used for her small business who didn't specialize in real estate tax and when I did the exchange my taxes jumped from $2,000-$3,000/year to $30,000 that year. After that I got excited about advanced tax planning and found a real estate tax specialist because I didn't want to write another $30,000 check. The specialist found the error from the year before's filing and I received a check from the IRS for $28,000. I knew then the importance of advanced planning when it comes to taxes and while I'm still a person who doesn't meet with my tax advisor until April and has to file an extension every year, (I'm working on it) I am passionate about teaching others the importance and benefit of using a tax specialist.
Pat says in the real estate world there are a lot of people who want to get their feet wet and their resources are limited and they stick with the same tax preparer they've always had. People don't realize what they've missed out on and this time of year is perfect for tax planning.
Pat says she often takes on the role of business advisor more than tax advisor which is another advantage to tax planning as she can inform clients of what business moves next year will help them save on their taxes.She says most business owners are not number-savvy so she translates their financial dashboard into layman's terms for them. She helps clients grow their businesses at the lowest tax burden. She is familiar with real estate codes. Her ideal clients are say, people who come to her having flipped 2 homes but wanting to flip 6 the following year. Pat knows exactly what strategies are available to them and from a tax side she knows the difference and advantages to flipping 1-2 a month versus 1-2 per year. Every transaction yields a different tax scenario, so investors must talk specific investments to their tax preparer.
Pat explained what Passive Activity Loss Limitation is with this example: Jack and Jill have a regular W2 job and they want to get into real estate investing on the side, so they buy a few rental properties. But if their income exceeds a certain threshold, that number hasn't been indexed for inflation since the Regan era in the 1980s. So if they buy a rental property they have to report all the rental income minus the expenses like mortgage, property tax, insurance, and often depreciation. Jack and Jill find themselves in a tax loss, not a cash flow. The ability of Jack and Jill to deduct that loss is curbed by section 469 meaning if their combined income is under $100,000 they can deduct the loss up to $25,000. Once their combined income exceeds $100,000 they lose .50 cents for every dollar and by the time their combined income is over $150,000 all their rental losses are suspended into future years, kind of like banking your savings but they're banking their losses until a time they can use it.
Pat will be speaking at the FIBI Pasadena meeting in January on the unknowns and pitfalls that are ahead for clients and investors as the new administration takes office in January so they can hopefully avoid them.
Pat can be reached in her office at 949.430.0338 and her email address is [email protected].
