Active vs Passive Investment in Real Estate

If you don’t know the difference between “active” and “passive” investment in real estate, you could well be filing inaccurate tax returns. So when the IRS calls and says you own a pile of taxes and some very painful penalties, don’t be surprised.

If you are a passive investor you are limited to $25,000 maximum in deduction (filing jointly) regardless of the real estate “losses” generated by your investment property. An “active” investor has no such limit. If you don’t know if you are active or passive, chances are astronomical that you are passive and that your losses (tax write offs) are limited. They are also limited as to how they can be used to reduce your tax liability. You see, passive losses can only offset passive income. That means that your passive real estate loss cannot offset your salary, commissions or traditional incomes.

To be able to write off all of the real estate losses generated, you must be a real estate “Professional”. That means that you have to spend 750 hours a year in your real estate business activities, and be able to make that argument successfully.

However, there are different types of real estate oriented business that can provide an avenue for massive losses when others would be severely limited. That however is a topic for a future review. Good luck. If I can answer any questions please feel free to contact me.

 

 

 

 

Are time-shares money down the drain?

A friend of mine is thinking about buying a time-share. I suggested that if he was seriously thinking about it, he should think again.

You’ve probably seen the ads on late night TV. “Own a fabulous time share in paradise for only a few dollars.” And you don’t need to worry about getting bored with the location you bought, because you can trade your time in Rogerville for time in Hawaii, California, Florida or the Bahamas. (Why do you think the industry came up with this trade out deal? Because everybody was so deliriously happy with their purchase and the time-shares were so easy to sell?) The promos sound great don’t they? Advertising messages usually do. They know how to play to our greed, our fantasies and our stupidity. And why do they do it? Consider hotel time shares that cost $10,000 per week to purchase. Lets see; $10,000 times 52 weeks per year equals $520,000.00 per room! Then they earn all the other associated maintenance, association and use fees as well. Do you think this could be profitable for the time-share company? Ya think?

If you’ve ever been to a high pressure time-share sales pitch where you are in a big room with other people who are regretting  having fallen for the “free stay if you sit through our pitch” ploy, you may have noticed an unusual  activity.  You might even have wondered, “Why, when someone buys a time share, do they announce the buyer overhead like they just won the lottery, blow whistles, uncork champagne and every body claps like mad?” Because hype sells. Excitement sells. “I can be special too” sells. “I want people to clap for me” sells. I’ve been there, and as I suspect you already know, I didn’t buy.

The bottom line is that the purchase price of a time share is only the tip of the financial iceberg. Hidden below the beautiful blue water is the monstrosity that actually keeps the beautiful white tip above water. There are the title charges, transfer fees, ongoing forever maintenance fees, taxes, , association dues and then the use fees for when you are actually in the time share unit. About two decades ago I had a friend let me “use” their time-share in Hawaii. By the time I was done paying the cleaning fees, the use fee and the nickle & dime whatever else they charged me fees, I had paid more than I would have had I stayed at a suite hotel on the island, complete with a kitchen and daily maid service. So I guess you could say that I have a bad attitude. (After all, you can say anything you like. I do. Right here in this blog.) That was my last time at a time-share.

In the interest of fairness, maybe things have changed in the last 20 years. Maybe they are all they are claiming to be. Maybe they are the greatest thing since sliced bread. My problem is that the advertising is the same, the promotion is the same and so I’m thinking that everything else might be the same too. But then again maybe I’m a little cynical. Ya think?

I may have adult onset A.D.D. but I can’t focus on the issue long enough to find out for sure.

OK, I admit it. I have it. It keeps me up late at night. I wake in the morning with my heart and mind racing. I get half way through a movie and realize I can’t remember what has happened so far. I hear voices at every business I visit telling me how things could be run better or made more profitable. I sit in my office and start doing one task and almost immediately find myself doing something entirely different. Yes I have it, the curse that has plagued men and women for years. It took the French to label those with this frightening malady, the horrendous disease that repeatedly makes people surrender to every mental attack, no matter how small. Like it or not, I have to accept it, I am an entrepreneur.

It’s good that I work for myself because I think that a smarter boss might fire me and then I’d have to wait to tell my wife that I had been canned, while all the time thinking that there had to be a better and more profitable way to fire people.

Unlike most people in business, I not only “run the numbers” but I chase after them and try to corral them into a nice functional herd, where upon I promptly shut the gate and leave them to be cared for by someone else. I have to ask, do I really love these numbers over which I have responsibility, or do I just like the idea of being responsible for them, but lack the aptitude and concentration to give them the attention they deserve. Probably so. I suspect that I am perfectly willing to go forward without giving my charges any thought until they start to misbehave, and even then I tend to care only for those numbers that are preceded with a dollar sign.

So I will bear my burden with a smile. I will go forward dragging my inability to focus on only one thing, like writing in my blog, without simultaneously trying to figure out how to monetize this process. It is my lot in life to be open to whatever crazy thing comes along. At least I can honestly say I am never bored. I think I could sell some anti-boredom, I just need to figure out how to package it. I’ll think about that for a while. After all, it’s better than working.