2: Tax Return Extensions: Why The Early Bird Doesn't Always Get The Worm

Welcome to Real Estate is Taxing, where we talk about all things real estate tax and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kalady, I'm your host, and I am so excited that you've decided to join me. Hey guys, welcome to today's episode. If, as you're listening to this, you are thinking, man, I really need to submit my taxes. I am very much hoping that you filed a tax extension.

That's what we're going to talk about today. I want to chat with you guys about what an extension is, what it isn't and a handful of reasons why you might need to file one or why filing one could be beneficial for you. Miss episode was actually inspired by a Facebook post I saw last week. Another tax professional posted. And they said outside of the client needing more time. Like they're waiting on a document or they're finishing up their bookkeeping. Outside of that.

I can't think of any good reason to file an extension. Can you. And the answer is, yeah, I can actually think of a few good reasons. So I would like to dedicate this episode to that tax professional. But I'm also hoping you guys will learn something cool as well. So what is, and what isn't an extension. An extension is an extension to file your taxes. It's not an extension to pay any tax you owe. So if you need more time to submit your tax return, this is the way to go.

If you think you might owe taxes for the year, you do still need to make an estimated tax payment before April 15th. To get an extension. There's two ways you can do this. You can file form 48 68. You can also effectively get an extension by going to the IRS website. And submitting an extension tax payment. Either of these two, we'll get you an extension. Uh, tax extension gives you an extra six months from the original due date to file your taxes.

So for your personal tax return, that is normally due on April 15th. This will bump out that due date till October 15th. Like with anything, there's always some potential downside. The big one here is that it also extends the look back period for an auditor. They can typically look back three years as a starting point. So if instead of that cutoff being April of the current year, we bumped it out to October. We're giving them that extra six month window as well.

So that's the biggest downside I hear in relation to an extension. But There's a lot of good things. And a lot of reasons you might need an extension. The first and most common reason.

Is your shit's just not together yet. That's okay. April comes really quick, especially after the holidays. If you're still working on your bookkeeping, you are still waiting on forms. You're sorting through receipts, whatever the reason, if you just need more time. That's what an extension is for. It'll give you that extra six months. We are seeing more and more people who are needing an extension because they're missing forms.

if you invest in a syndication, anything where you're getting a K one. There's a good chance. You will not be getting that form until after April 15th. So in that case, you have no option, but to file an extension. And my advice is to let your tax professional know ahead of time. Right. If you know your taxes can't be finished until June. Then telling your accountant upfront, Hey, don't crunch to get my return done in January. I won't have everything till June.

That's going to make things run a lot more smoothly and there's not going to be back and forth and half done things and waiting on one more document. It'll make you their favorite client. If you can openly communicate that and give them a date, you expect to have everything. And they'll help you make an estimated payment. If you need to. And then, you know, there's no chance of it getting done by April 15th because you won't even have all of your documents yet.

That's the most common reason people file an extension. It's just for needing more time. There's several other reasons that aren't thought about as often. But can give you a really good opportunity in terms of tax planning or where they might need to happen because of other circumstances. One of the more common ones. Is just having additional time to fund some retirement

accounts. There are retirement accounts where the date to contribute is the tax return due date, including extensions. So, if you're trying to figure out how much you want to contribute, how much money you made for the year, you're finishing up your books. You're trying to get all of your final numbers. Having that extra cushion of an extra six months to decide that and nail it down and figure out how much you want to contribute. Can be really nice.

The next reason that you might need an extension. Comes up from doing a 10 31 exchange. Uh, 10 31 exchange lets you effectively sell. A piece of real estate has to be some kind of investment asset. And you get to defer that gain. As long as you purchase a qualifying replacement property. There are timelines that are required to complete this transaction. The window for closing on that replacement property is 180 days from when you start this exchange.

So it is not uncommon that an exchange will straddle two years. If you didn't sell the first property until December, there's a chance you won't close on the replacement property before April 15th. In that case, you will have to file an extension. When you do a 10 31 exchange. You have to report the entire exchange on the tax return, where the original property was sold. So if you sold a property in 2023 and completed the 10 31 exchange in 2024, but it didn't finish.

You didn't close on that replacement property till April 20th. You would have to extend because you would need all of that information on the new property. To finalize your 2023 taxes. So if you are doing a 10 31 exchange that falls across two calendar years. There is a good chance. You'll need to file an extension because you need all of the information from the property you're selling as well as the one or more properties you acquire.

To be on the return for the year you sold that original property. So you might need a little bit of extra time. The next reasons to consider a tax return extension. Relate a little more to tax planning and tax strategy. If

you are either a real estate professional or you're doing the short-term rental loophole. Or you just have a reason to generate some passive losses with your real estate this year. If you are doing a cost segregation study. To allow some of the components of your property to be pushed into shorter lives. Giving you a bigger tax write off. Having an extension can give you more time. To look at what year this works better in. Let me explain. If you do a cost segregation study on a property.

Later than the year in which it's acquired. There's a good chance. You will have to file form 31 15. This is a change of accounting method. This is how you're telling the IRS. Hey, I was depreciating a whole ass house, and now I'm going to depreciate a house, but also some carpet and some land improvements and a bunch of other stuff. So it is with that form. You are allowed to file form 31 15 on any timely filed tax return. So that's a return filed by April 15th.

Or by October 15th, if you submit an extension. You cannot submit form 31 15 on an, on an amended return. In most cases. So if you're looking at this and you're trying to decide if you should do a cost segregation. For this year or the next year. Knowing that you will have to file form 31 15 in the year that you submit this study. And in the year that you submit this. That is when you get to take this large write-off for these accelerated depreciation items or for bonus depreciation.

Having an extension in place. Means that instead of having to decide by April. If having a cost segregation on this year's return or next year's will be more beneficial for you. You now have until October to decide. So you have now made it through most of the next tax year. Before you have to decide if you should be doing a cost segregation study on your current year tax return or your next year's tax return. By waiting until October and making it through most of that second year.

You can look side by side. At your income for both years and you can really determine. During which year would having this large write-off. More greatly benefit you. So don't jump the gun and just do a cost SEG. Don't think about it. Submit it with your return. Put an extension in place. Look at the numbers for both years. You can do a cost segregation at any point until your tax return is submitted, including extensions. So it really gives you a great planning opportunity to get to look at.

Three quarters of the next tax year before making this decision. The final reason. That an extension for your taxes. Can be helpful. Is that it gives you more time to submit what is known as a superseded tax return. Versus an amended return. Let me explain. Uh, superseded tax return. Is any tax return that you resubmit before that filing deadline? So, if you filed your taxes February 1st, you were, you know, on it, you're on the ball. You're getting them turned in.

And then March 1st you receive another tax form that you forgot you were waiting for. If you resubmit your taxes as a superseded return, you're just sending in a new 10 40 before the deadline. What happens is that superseded tax return replaces the original one. It's like that original one doesn't exist. It gets bumped out of there and replaced with the new one. The differences and amended return. That original return still exists. You are just saying, whoops, I need to make a change to it.

And they have record of both. Both of those things are in your file. If you file an extension. You now have a window out until October. Where you can file a superseded tax return. Now what you might be thinking is why do I care? The reason is there are certain elections and certain things that can only be changed on an originally filed tax return. There are certain things that you cannot change with an amendment.

So if you filed your tax return February 1st, You are jumping the gun, you got everything in there. And then later you realized that there's something related to your taxes, where there's a certain election that could benefit you. If you have an extension in place. Even if you don't need it, right. You're planning to submit in February, you are very organized. But if June comes around and you meet with your tax professional and you guys realize, oh, this would be such a huge benefit.

There are certain things that you can submit on a superseded return that you can't with the amended. If this is one of those things, you now have all of that time to find it and resubmit your tax return. This gives you a huge window of time. Where you can send in a new one with that credit, with whatever it is that's going to benefit you. It is going to bump out that original tax return. It just replaces it. The IRS sets it on fire. We pretend it never existed.

And you can just treat that new one as an originally filed return. If you hadn't filed. An extension, right? If you just said I'm filing in February, why would I need one? Gonna just go ahead and submit. And then in June you found that you missed that election and you wanted to send an amended return because now we're, after the deadline, you didn't extend your deadline. You're just sending in a change to your return.

You won't be able to, you will not be able to make certain changes using an amended return. So if you are in a year, Where there are new circumstances on your taxes. Or where there is pending tax legislation that might change. Or where you just want a little more time for planning. Having an extension in place just gives you more time. What I like to tell people is a tax extension is basically the condom of the tax world. It's better to have it and not need it.

Then to find out you need it and you don't have it. So. That's the whole deal with extensions. There's a lot of reasons you might need one. And several of them relate to giving you tax planning opportunities and getting to look at the big picture. If you file an extension and don't end up using it, if you file an extension,

but you still submit before April 15th. No one comes and kicks you. There's no penalty for doing that. You're not in trouble. You are allowed to do that So I hope this helped you guys. I hope you've got a better insight to what a tax extension is and some ideas for when and how you could use one in your own tax circumstances.

As always, I hope that you found this show helpful, but remember, before you do anything that we talk about, make sure you talk with your tax professional, because while I'm a tax strategist, I am not your tax strategist. As always, I hope you will subscribe and come back and I will talk

to everyone next week.