Real Estate Dealer or Investor

Investors in real estate generally do so for financial gain.  The upside to investing in real estate is that investors get a return on their investment and receive cash distributions but are also able to defer income tax.  The significant depreciation that the property provides offsets the rental income and often times generates losses.  These losses that are passed through to investors are not usually deductible in the year incurred (unless the taxpayer is a real estate professional) because taxpayers that invest in real estate are generally considered passive investors.  Passive investors are only able to offset passive losses against income from passive activities.  In the case where a taxpayer may invest in multiple real estate transactions they may incur a net loss on one investment and a net gain on another.  This passive income and loss would offset one another.  Otherwise, passive losses are carried forward until they can be offset by passive income or until the property is disposed.  In the case of disposal, any prior disallowed losses would be released and offset ordinary income.  If the property is held for longer than a year the gain is taxed at the capital gains rate of 20% and any depreciation recaptured would be taxed at a rate of 25%.  Both rates still favorable to the maximum ordinary rate of 39.6%.  In addition, pass through income from real estate investments are generally subject to the net investment income tax of 3.8%.

Dealers in real estate have different tax implications than investors and do not benefit from the characteristics discussed above.  When you are a dealer in real estate you are considered to be active and materially participating in the trade or business.  The real estate is not depreciable and so the significant offset to the income is lost.  A dealer in real estate treats the property as inventory.  The sale is considered to be done in the ordinary course of business.  As such, any gain or loss incurred is taxed in the current year at ordinary rates.  Losses that are incurred as a dealer are deductible in that year and are able to offset other income.  Unlike investors in real estate, the dealer’s income is not subject to the net investment income tax of 3.8%.

Factors to consider when determining whether property is held for investment or for sale in a trade or business include:

  • The nature of the acquisition of the property
  • The frequency and continuity of sales over an extended period
  • The nature and the extent of the taxpayer’s business
  • The activity of the seller about the property
  • The extent and substantiality of the transactions

For more information about these factors and how investing or dealing in real estate impacts your tax position contact a member of our Real Estate team.

The Georgia Retraining Tax Credit

Is your company investing in employees through means such as new equipment, new software, or new technology? If so, your company may be eligible for the Georgia Retraining Tax Credit. The purpose of this credit is to encourage employers to continuously invest in their employees via the very means mentioned above – upgrading equipment, acquiring new technology, and even completing ISO 9000 training.

Only eligible programs qualify for the Georgia Retraining Tax Credit. Eligible programs must be designed to enhance quality and productivity or to teach certain software technologies. The retraining tax credit covers expenses incurred as part of the retraining, although the cost of the new equipment, software, or technology itself is not covered. Covered expenses must be approved by the Technical College System of Georgia and include:

  • Cost of instructors
  • Cost of teaching materials
  • Employee wages during retraining
  • Reasonable travel expenses

The retraining credit is a Georgia-only credit that can be used to offset up to 50% of a company’s Georgia income tax liability. The actual credit amount amounts to 50% of the covered retraining expenses up to $500 per full-time employee per program. The maximum annual credit per employee is $1,250. Should the credit not be fully used in one year, the excess can be carried forward for 10 years.

HLB Gross Collins, P.C. has been serving some of the Southeast’s most prominent companies for nearly 50 years. We work closely with clients to ensure they are taking advantage of all available credits and savings opportunities.

Laura Madajewski Honored at Georgia Manufacturing Alliance Summit

Congratulations to HLB Gross Collins, P.C. Manufacturing and Distribution Practice Leader, Laura Madajewski, who was recently honored at the Georgia Manufacturing Alliance Summit. She received an award to recognize outstanding leadership in networking for the North West Chapter of GMA. HLB Gross Collins, P.C. hosts the Northwest Chapter for monthly networking group luncheons, as well as various training, educational and Advisory Board gatherings for GMA.

The award recognized Laura and HLB Gross Collins, P.C. as premier service providers and acknowledged our commitment and dedication to GMA and the Georgia Manufacturers & Distributors community, which is made up of approximately 10,000 manufacturers in Georgia.


Koskinsen Warns of Impending IRS IT System Failure


Current IRS Commissioner John Koskinen’s term is scheduled to end November 12, 2017. Speaking at the Urban-Brookings Tax Policy Center on October 31, Koskinen sent a strong warning to lawmakers of an impending IRS IT System failure. As the IRS’s available resources dwindle, “it’s not a question of whether, but when this system will fail,” he said. Koskinen noted the IRS is currently operating on antiquated IT systems while fending off 4-million cybersecurity threats each day.

November/December Dates to Remember

November 13

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the third quarter of 2017. This due date applies only if you deposited the tax for the quarter in full and on time.

November 15

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in October if the monthly rule applies.

Annual exempt organization return.  File a 2016 calendar year Not-For-Profit return (Form 990) by November 15.  This due date applies only if you timely requested an automatic six-month extension.

December 15

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in November if the monthly rule applies.

Corporations. Deposit the fourth installment of estimated income tax for 2017.

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