The Texas real estate market is one of the most dynamic in the United States, and it continues to attract investors, developers, and entrepreneurs looking for opportunities. Yet with growth and opportunity also comes responsibility, especially when it comes to taxes. Many real estate professionals assume that tax compliance is straightforward, but the reality is more complex. From overlooked deductions to improper entity structures, tax missteps can lead to costly audits, penalties, or even lost revenue. Partnering with a skilled real estate tax accountant can make the difference between a thriving business and one weighed down by preventable financial mistakes.
Mistake 1: Misclassifying Business Entities
One of the most common mistakes in real estate taxation is the misclassification of a business entity. Many investors start small and operate as sole proprietors or partnerships without considering the long-term tax implications. While these structures may work for a short period, they can quickly become inefficient as the business grows. For example, a sole proprietor may face higher self-employment taxes, while a partnership may limit liability protection.
In Texas, many real estate professionals benefit from forming limited liability companies (LLCs) or electing S corporation status to take advantage of tax efficiencies. An LLC can provide liability protection and flexible management options, while an S corporation can help reduce self-employment taxes by allowing owners to pay themselves a reasonable salary while receiving additional income as dividends.
The mistake comes when real estate businesses do not evaluate or revisit their entity structure as they grow. What worked in the early stages may no longer be the best choice once you begin acquiring multiple properties, hiring staff, or expanding into development projects. A knowledgeable real estate tax accountant can help evaluate your current structure and recommend changes that will reduce tax liability while aligning with your business goals.
Mistake 2: Overlooking Deductible Expenses
Texas real estate businesses have access to a wide range of deductible expenses that can significantly reduce taxable income. Unfortunately, many business owners fail to track or claim these deductions properly. Commonly overlooked deductions include:
- Mileage and travel expenses: Driving to and from properties, meetings, or inspections may be deductible if properly documented.
- Home office expenses: If you use part of your home exclusively for business, you may qualify for a home office deduction.
- Professional fees: Legal, accounting, and consulting costs related to your real estate activities are often deductible.
- Maintenance and repairs: Expenses incurred to keep rental properties in good condition can typically be deducted immediately.
- Depreciation: Real estate investors often forget to account for property depreciation, which can provide substantial long-term tax benefits.
Without detailed recordkeeping, many of these deductions go unclaimed. Over time, that translates into higher taxable income and more money owed to the IRS or the Texas Comptroller’s office.
The key to avoiding this mistake is implementing a reliable system for expense tracking and documentation. Business owners should consider software that integrates with bank accounts and credit cards to automatically categorize expenses. A real estate tax accountant can also review expenses to ensure nothing is overlooked.
Mistake 3: Misunderstanding the Texas Franchise Tax
Unlike many states, Texas does not have a personal income tax, which can make it an attractive place to do business. However, Texas does impose a franchise tax, which applies to many real estate businesses, including LLCs and corporations. The franchise tax is based on a business’s gross receipts, not profits, which means even companies with slim margins may owe money.
Many business owners misunderstand how this tax applies to them or fail to file altogether, believing that their size exempts them. While there are thresholds for small businesses, once your gross receipts surpass the no-tax-due limit (which is updated periodically by the state), you are responsible for paying. Additionally, real estate businesses must carefully calculate their “margin,” as Texas allows different calculation methods, including:
- Total revenue minus cost of goods sold.
- Total revenue minus compensation.
- 70% of total revenue.
- Total revenue minus $1 million (adjusted periodically for inflation).
Choosing the wrong method can result in paying more than necessary.
Failure to comply with the Texas franchise tax requirements can lead to fines, interest charges, and even the forfeiture of the right to conduct business in the state. Working with an expert ensures that your filings are accurate and that you are paying the minimum amount legally required.
Mistake 4: Improper Handling of Capital Gains
Real estate transactions often involve the sale of property, which can trigger capital gains taxes. A common mistake among Texas real estate professionals is failing to plan for these taxes or misunderstanding how they are calculated.
Capital gains taxes depend on whether the property is held short-term (less than one year) or long-term (more than one year). Short-term gains are taxed at ordinary income rates, while long-term gains generally enjoy lower rates. Some investors mistakenly believe all real estate sales qualify for long-term treatment or fail to account for depreciation recapture, which can increase taxable income.
Another overlooked strategy is the use of a 1031 exchange, which allows real estate investors to defer capital gains taxes by reinvesting proceeds into a similar property. Many business owners fail to take advantage of this powerful tax-saving tool, often because they are unaware of the strict rules governing timelines and qualifying properties.
Improper handling of capital gains not only leads to unexpected tax bills but also undermines the wealth-building potential of real estate investments. By working with a tax advisor who understands these nuances, you can plan transactions strategically to minimize taxes and maximize profits.
Mistake 5: Neglecting Payroll and Contractor Compliance
Real estate businesses often employ a mix of staff and independent contractors, from property managers to administrative assistants and real estate agents. A common mistake is misclassifying workers, which can have serious tax consequences.
For example, labeling an employee as an independent contractor may seem like a cost-saving measure, but the IRS and Texas Workforce Commission take misclassification seriously. If caught, your business may be liable for back taxes, penalties, and interest.
Additionally, many real estate businesses fail to stay compliant with payroll taxes. Employers must withhold income tax, Social Security, and Medicare taxes from employees’ wages, and also pay the employer portion. Failing to remit these taxes accurately and on time can trigger significant penalties.
Another frequent oversight is not issuing Form 1099-NEC to contractors who are paid more than $600 in a tax year. Missing this step can not only create compliance issues but also draw unwanted attention during an audit.
Proper worker classification, payroll systems, and timely filings are essential to keeping your business compliant. A real estate tax accountant can set up systems that simplify payroll, track contractor payments, and ensure all required forms are submitted.
The Importance of Proactive Tax Planning
Each of the mistakes outlined above shares a common theme: they are avoidable with the right knowledge and preparation. Tax compliance should not be treated as an afterthought or a once-a-year activity. Instead, it requires proactive planning throughout the year.
By conducting regular financial reviews, updating your business entity as needed, documenting expenses, planning for capital gains, and staying compliant with Texas tax requirements, you can transform tax season from a stressful scramble into a strategic advantage.
Working with a specialized tax advisory firm ensures that you do not just meet basic compliance requirements but that you are also positioned to maximize deductions, minimize liabilities, and achieve long-term success.
Contact Lien Phat & Co Tax Advisory Today
Texas real estate businesses face unique challenges and opportunities when it comes to taxation. From misclassifying entities and overlooking deductions to mishandling capital gains and neglecting franchise tax obligations, the consequences of these mistakes can be severe. The good news is that they are entirely preventable with expert guidance.
At Lien Phat & Co Tax Advisory, our business is helping your business succeed. Whether you need help with business planning, back-office support, or advanced executive strategies, we have the programs and services you need to thrive. Founded by Patrick Huynh in 2001, we bring more than 22 years of experience in helping entrepreneurs grow their businesses while staying compliant and financially strong.
Do not let common tax mistakes erode the success of your Texas real estate business. Reach out to Lien Phat & Co Tax Advisory today to schedule a consultation. Together, we can identify opportunities, correct missteps, and put your business on the path to greater profitability.