Investors can use real estate to help diversify their portfolio. Both residential and commercial properties can play a role in one’s financial portfolio and, in some cases, can also provide tax advantages.
Use real estate for tax advantages carefully
In the past, property owners could potentially deduct financial losses connected to personal property on their federal tax returns. The new tax law has basically removed this deduction. However, there are cases where deductions may remain available for an investment property.
Those who plan on taking such deductions are wise to do so carefully. The Internal Revenue Service (IRS) will likely review these deductions more carefully after a recent case called out the agency for failing to hold certain taxpayers accountable for allegedly illegally taking advantage of the system.
The report provides an example of taxpayers allegedly cheating the system
The case involves an individual that used a business entity to purchase a property, allegedly as an investment property. The property in question is next door to the individual’s primary residence. This led skeptics to question the property owner’s investment claim.
The real estate agency representing the supposed investment property described the property as “one of the most significant parcels on the entire East Coast.” As a result, in order to secure the purchase, the accused paid over twice the asking price.
The accused then allegedly deducted the $34.6 million premium paid for the property. The accused claims the deduction was a legal deduction for a loss on an investment property. The complaint against the accused states the deduction was tax fraud.
Real implications for real estate purchases
The case is not yet resolved. Regardless, the fact that the IRS is currently going through this issue leads the agency to examine real estate ownership documents more closely. As such, those who are looking to use their real estate purchases for tax savings are wise to do so carefully and keep records to support the claim.