Archive for the 'Taxes' Category
Real estate is one of my absolute favorite areas in the tax law because there is so much flexibility in how to do things to legally maximize the tax benefits available.
Real estate is also one of the most complex areas of the tax law. This makes it easy to overlook important steps, which can lead to missing out on tremendous tax savings.
I recommend reviewing your tax strategy throughout the year, particularly as it relates to real estate. This makes it much easier to make adjustments timely, minimize oversights and reduce stress at the end of the year and tax return time.
With the end of the year approaching quickly, it is an ideal time to implement a year round strategy to review your tax strategy as it relates to your real estate.
Start with my year-end checklist for rental real estate and adapt it to use throughout the year.
Here are a few items from the checklist my team and I use:
Half of all homeowners may be paying too much. Here’s what you can do about it.
Home prices are still going down in many markets. But your property-tax bill might well be going up.
The good news: There are ways to fight back.
Property taxes across the U.S. have increased by nearly 20% from 2005 to 2009, the most recent data available, according to an April study by the National Association of Home Builders. The median annual real-estate-tax payment was $1,917 in 2009, up from $1,614 in 2005.
Over the same period, home prices in major urban centers fared badly, decreasing 31%, according to the Standard & Poor’s/Case-Shiller 20-City Composite Index.
Property taxes don’t move in lockstep with home values because local governments typically don’t measure values every year and some have limits on annual property-tax increases, says Natalia Siniavskaia, a housing-policy economist at the home-builders group. That means your current property taxes might reflect your home’s value when the market was healthier. Property-tax adjustments lag behind changes in home prices by an average of three years, according to the Congressional Budget Office.
Property taxes can be a major expense for investors, but understanding how this tax works could save you thousands of dollars in the long run.
The first thing to learn about property tax is that property is divided into two categories: real and personal. Real property includes land, buildings and permanent property attached to land— such as a well. Personal property is everything else, including clothes, books, electronics, furniture and financial holdings. Personal property is further divided into either tangible property or intangible property. Tangible property is anything you can touch, such as a sofa or a blender and intangible property includes abstract possessions like stocks, bonds and patents.
There’s no doubt about it – one of the greatest benefits of real estate investment are the tax benefits the investor receives! It’s entirely legal to shelter income and defer capital gains. It’s entirely legal to minimize taxation and maximize the money the investor keeps on an after-tax basis.
The concept of depreciation (also known as cost recovery) operates on the assumption that physical assets lose an equal amount of value each year due to wear and tear. Another term for this is “non-cash expense.” In other words, it doesn’t really take any cash out of the investor’s pocket. However, it’s treated like an expense or deduction when adding up your income.
And the investor gets a great result from this concept – it decreases taxable income and, as a result, lets the investor shelter positive cash flow from taxation. In other words, depreciation (cost recovery) lowers income taxes for the current year and defers them to a later date.
Keep in mind that cost recovery or depreciation does not eliminate income taxes. In technical terms, an annual depreciation deduction is figured on a reduction in basis of the property. This is calculated as the investor’s original cost in the property plus capital improvements. This is then recaptured (added to the investor’s taxable profit) in full and taxed upon disposition or sale.
We live in a “lawsuit happy” society. Attorneys advertise on billboards with slogans such as “Have You Been Injured? You May be Entitled to a Cash Award!” Nobody wants to accept responsibility for their own actions. Everybody is a victim.
It’s sad but true… when you build wealth and get rich, you become a target of lawyers, the IRS and everyone that has less than you. It’s not what you make, it’s what you keep! But how do you keep it in today’s lawsuit-crazy world?
I became involved in wealth protection around 1990. Many of my clients were real estate investors that were running from creditors after the real estate and stock market crashes in the late 1980s. They came to me for help in holding off the creditors, foreclosures and lawsuits. Unable to recover financially, many of them lost all of their assets and filed for bankruptcy protection.
The clients that made it through the crunch taught me a thing or two about financial survival. They were smart enough to arrange their business affairs in case of a crash. Nobody thinks about bankruptcy, business failure, lawsuits and financial distress when times are good. However, as you will discover in this report, it is the most important time to think about it! You must have a plan for your wealth or you will be destined to fail at this game we call “wealth preservation.”
If you or someone you know dumped some "bad" real estate, then there might be a ticking tax bomb coming your way. It’s a Form 1099-C and it means you have a "cancellation of debt", and cancellation of debt is taxable.
So if the lender forecloses and takes your property from you, or you do a short sale, chances are the current value is less than your loan. That means the lender has to forgive part of the debt or may pursue you for the difference.
If they forgive the debt, you have a cancellation of debt. And if you have a cancellation of debt, you have a taxable event. The amount of debt that is cancelled is taxable income to you. You report it on your Form 1040 just like any other type of ordinary income. In other words, you never got a check, but you have to pay tax on it.
So, let’s go with the foreclosure or short sale scenario and assume that your lender has forgiven the debt. Just as a note though, don’t assume that the lender is forgiving all the debt. In most states, they can pursue you if you’ve refinanced the first loan or for a second mortgage. And depending on your particular state laws, they could wait years to come after you for the amount. Yikes!
Seven Reasons You Want to Use Independent Contractors To Grow Your Business
There are dozens, maybe hundreds, of strategies that we’ve used successfully over the years to save our clients taxes. One such strategy is to use Independent Contractors to build your business. I’m going to cut right to chase here and just jump into this.
Reason #1: It’s easier to ramp up your business
You can contract with Independent Contractors (ICs) for short term, month-to-month work or just by project. You don’t have to worry about training them or providing tools for them to work with.
There is an assumption that they can hit the ground running. If they can’t, the worst case is you’ve tried it out for only 30 days. You didn’t have to invest time in training them and providing salary & benefits during this time. They either can perform, or not. If they don’t, they’re gone.
Reason #2: It’s easier to change the business model if you need to change quickly
If your real estate investing business goes down, it’s a lot easier to stop using an IC than it is letting an employee go. Besides the emotional issues of letting go an employee who depends on you completely for their income, there are also legal and benefit issues. You might be forced to cover the employees under the new COBRA laws. Your unemployment rates will go up. Read more »
During the early years of my real estate investing I ran my business as a sole proprietor because I was confused about asset protection. All the books and expensive courses only added to the confusion, and the subject of asset protection only became more frustrating for me.
Luckily, I survived with only minimal damage, but there comes a point when it is time to assess the best legal structure to use for real estate investing. This becomes increasingly important as your net worth grows.
Consider this scenario. You are sued for an accidental injury that occurred on one of your properties where you held title in your name personally. You are sued for $2,000,000.Your insurance only covers $1,000,000. That’s a very bad day.
The biggest mistake you can make in real estate is to hold title on your property in your own personal name. Title to property is public record. Anyone can look up what you own, determine its market value, and deduct what you owe to determine what they can attempt to sue you for. It’s like painting a bulls-eye on your back for prying eyes such as attorneys, creditors and even your tenants.
So what entity provides you the best asset protection? How do you limit your liability exposure? Read more »
Every real estate investor knows that investment property provides more tax benefits than almost any other investment. Therefore, maximizing those tax deductions only makes good business sense.
Let’s take a quick look at the most important tax deductions available as an owner of investment property:
1. Mortgage Interest
Your largest deductible expense is likely to be interest. There are two types of interest that you can deduct. The first is mortgage interest from any mortgage loan on the property. This includes Home Equity Lines of Credit (HELOC) and other loans secured by your property. The interest deduction applies to any of these loans provided that they were used to acquire and/or improve your investment property.
Additionally, credit card interest can also be deducted for goods and services used in the operation of your rental property. Closing costs and points paid by you to close on your mortgage loan is also deductible.
2. Depreciation
Depreciation is simply the loss in value of your income property over time due to physical deterioration, age, and normal wear and tear. Fortunately, the IRS allows you to depreciate income properties over their “useful” life. This is defined as 27.5 years for any residential property (1 to 4 unit properties) and 39 years for commercial properties. Depreciation can provide you a significant and welcomed deduction every tax year!
3. Insurance
Premiums paid for insurance policies are tax deductible expenses too. This includes, but is not limited to, fire, theft, flood, and landlord liability insurance. Also, health and workers’ compensation insurance for your employees (if any) can also be deducted. Read more »
The IRS has begun targeting individuals with larger mortgage interest deductions in an effort to increase their tax revenues. They are currently sending out audit notices to DC residents as part of their test, but will quickly expand to the rest of the country once their audit systems are in place. If you’re a real estate investor you need to be aware of this and plan accordingly.
You must meet three criteria in order to legally take the mortgage interest deductions:
- You can only deduct the mortgage interest on debt up to $1,000,000. This includes your personal and second residence combined.
- You can claim an additional $100,000 for a second loan or HELOC. (This is completely disallowed for AMT taxpayers.)
- You can only deduct the original amount of your indebtedness. In other words, once you pay down your loan your deduction does down and stays down. Even if you refinance, you can only claim the original (lower) amount of your loan before refinancing. This is one item that most people forget or don’t know about.
The IRS may strike gold here. They will want to see where you spent the money from your refinances or new HELOC loans. It would be wise to show that the money was used for home improvements or business purposes.
With the economy in disarray and the federal government hungry for additional tax revenues, it’s more important than ever for you to be on top of the real estate tax law changes. Remember that a good tax advisor can help you achieve your real estate investing goals sooner by avoiding the pitfalls along the way.
There is no human invention more complex than the tax codes, and among the most complicated are the laws surrounding real estate investing. So, what follows is NOT to be considered legal advice — consult your attorney or tax accountant before making any decisions.
Well, now that the rear is covered, what considerations should the real estate investor keep in mind? Since laws vary between countries, and between states within the U.S., any general advice would be worthless. But here are some particulars that apply in many areas. Read more »
