Are you giving the I.R.S. too much of your heard earned real estate investment income? I venture to guess the answer may be Yes. Since the real estate market in Southeast Michigan has rebounded it’s the perfect time to make sure that your business is structured properly allowing you to take the most benefits allowed to you.
As a believer in the 80-20 rule I’ll cover the easier of the 80% tax liability reducing tips for real estate investors. What I can’t cover are creative deductions. You’ll have to work out those details with your tax professional. I will reveal the 5 most powerful tips I’ve learned from hours and hours of discussions with CPA, investors, & the like. The tips are from my personal experiences over decades of real estate investing.
1. CPA/Tax Strategist – Find an extremely competent tax preparer/strategist who intimately understands real estate investing. Speak with active, successful real estate investors to find out who they are using. Make a list and interview them. It took me over a decade to fins the person I use. They actually interviewed me to make sure I was a good fit for them!
2. Long Term & Sort Term Investments – Long Term & Sort Term Investments Should Probably Held In Different Entities. Anything you are going to hold more than 1 year should be separated from any property your are moving in less than a year. In my opinion this is the first task you should shoulder your CPA/Tax Preparer with. They need to help you understand and decide which entity structure is right for you.
3. Organization – No Excuse To Be Sloppy – The more disorganized you are means he more money you lose, or pay in taxes. This is where most investors stumble. It’s hard to stay organized especially when investing is a part time job for most people. Remember this – the I.R.S. can and will punish you severely for being disorganized.
Unfortunately real estate investing offers lots of fun activities that can allow us to make a lot of money. From finding deals and demoing out walls to structuring partnerships and designing kitchens – so organizing your receipts and classifying your expenses properly falls to the bottom of the list.
Fortunately for a nominal fee there are many bookkeeping services out there, both local and online, that can help you stay organized. With the recent updates to Quickbooks Online keeping your expenses in order is easier than ever – trust me! As an entrepreneur and small business owner you owe it to your business, yourself & your employees or sub contractors to stay in control of your company’s books.
Quickbooks allows you to connect your business checking & savings accounts along with your debit/credit cards and automatically imports them for you. You can teach QB to classify certain expenses and adjust how things are organized. It can and will save you thousands of dollars or hundreds of hours of dull book work.
The other reason you need to stay totally on top of your books is to know where you are at an any given time concerning the costs related to a property. You may realize that wholesaling is much more profitable per hour than rehabbing or vice versa. Being able to pull that data from QB will help you be more profitable.
4. Own Long Term Holds As Rentals Owning rentals is one of the best ways to earn money in this country. It’s one of the most tax advantaged ways to create income. If you own a $100,000 rental home, you get to depreciate the structure of the property (not the land) over 27.5 years. Let’s say the lot is worth $25,000, that means the structure (and your tax basis) is $75,000. Each year, you get a tax deduction of $2,727.27 ($75,000 divided by 27.5 years).
So after all expenses, including maintenance, if your cash flow on that rental home is $225 per month, depreciation offsets that cash flow completely and you may not have to pay any taxes on that income! Plus, if the property increases in value, you’re not paying any tax on the appreciation so long as you continue to own it.
5. Wealthy People Own Real Estate – Every election cycle you hear politicians talk about how the wealthy pay so little in taxes. The reality is the wealthiest people pay an extremely large total sum in taxes, however on a percentage basis it’s less than the middle class. Here’s why…
The wealthy earn a portion or possibly all of their income through investments as opposed to earned income from a job like the middle class. Rental income is one such investment that allows you to earn a great deal of money but not incur a heavy tax liability. Here’s what happens when you sell a rental property after owning it for at least 1 year. You should only incur a long term cap gain at 15% as opposed to whatever income tax level you are at. Most of the middle class in at 28%!
If you buy a property, fix it, and sell it on an agreement for deed that lasts at least 366 days your tax liability can be almost cut in half. Plus on a rent to own/agreement for deed you can usually sell it for a little more or in a rising market sell it for next years prices. It’s a double whammy winner for you.
Lastly yo can take advantage of the 1031 exchange. Instead of taking the profits as income the I.R.S. allows you to “move them” to a new property thus dodging another tax bullet. There are multiple rules and regulations to follow to take advantage of a 1031 exchange but they are pretty simple. You can find them all at IRS.gov
So you can see why you should be earning more of your income from investments jus like the wealthy.