The Real Estate Investor’s Tax Strategy Guide, by Tammy H. Kraemer and Tyler Kraemer (Adams Media, 2008). My rating: 5 of 5.
You own a rental or two, or you are about to buy your first. You know the rent and the mortgage payment to the dollar. What you may not know is how much of the profit the tax code lets you keep, and how much depends on choices you make in the first year. This book walks you through those choices.
What the book covers
The Kraemers wrote a plain-language guide to the federal tax rules that matter most to people who invest in real estate. They cover the line between repairs and improvements, splitting the purchase price among land, building and furnishings, the expenses a landlord can deduct, the at-risk and passive loss limits, vacation homes that are partly rented, the home sale exclusion, installment sales, and like-kind exchanges in detail.
The writing is clear and the examples are concrete. The book predates two major federal tax laws, so treat it as a guide to the concepts and check every number against current law.
What stayed with me
Repairs and improvements are different. The authors put it simply: “Repairs are preferred with rental properties because the entire expense is deductable in the year it is paid.” Improvements must be depreciated over time. Today the tangible property regulations draw that line, and they include safe harbors that can help small landlords.
Allocate the price on day one. Land does not depreciate. The building does, and appliances and furniture depreciate faster. A careful split at purchase, and a clean record of it, pays off for years.
Losses have limits. You can deduct losses only to the extent of what you actually have at risk, and the passive activity rules sit on top of that.
The exchange deadlines are hard deadlines. You have 45 days after the sale to identify replacement property and 180 days to close, and the 180 days can end sooner if your return comes due first. As the authors warn, “The IRS does not grant extensions on these time limits!”
Your own advisors cannot hold the money. In an exchange, the qualified intermediary generally cannot be someone who acted as your agent in the prior two years, including your attorney, CPA or real estate agent, with limited exceptions for services related only to the exchange. Plan for that early.
A few notes
Some figures and phrasing have aged. Long-term capital gain rates are now 0, 15 or 20 percent, with a 3.8 percent net investment income tax for some taxpayers, and the depreciation portion of a building sale is taxed at up to 25 percent as unrecaptured section 1250 gain. A like-kind exchange defers depreciation recapture. It does not avoid it. Since 2018, exchanges apply only to real property. The mortgage interest limit is now tied to $750,000 of acquisition debt, and selling other investments to pay down a mortgage has its own tax cost.
The book’s opening quotation credited to Theodore Roosevelt is widely repeated, but I could not verify it, so I have left it out.
Washington readers: there is no state income tax here, and Washington’s capital gains tax exempts real estate. But the real estate excise tax applies when property changes hands, at graduated rates.
Who should read it
Owners of rental property, people thinking about their first investment property, and anyone considering a like-kind exchange or an installment sale. It teaches the vocabulary before you meet your tax preparer. Pair it with current IRS publications.
Quotes are short excerpts credited to the authors. As an Amazon Associate I earn from qualifying purchases. The price you pay does not change. I read this book on my own, and no one asked me or paid me to review it. This review is general education, not legal or tax advice. Laws change, and the right answer depends on your facts. Legal services are offered only through Centerbridge Law Group, PLLC, 1610 Commercial Avenue, Suite 203, Anacortes, Washington 98221. See Disclosures.