tax strategies for real estate investors

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Tax Strategies For Real Estate Investors

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  • 1. Tax Strategiesfor Real Estate Investors James R Fisher, CPA/PFS, CTC Certified Tax Coach Whitehouse, OH 43571 419-877-0730

2. The Secret to Beating the IRS

  • There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesnt prevent that.
  • William H. Rehnquist
  • Tax planning is financial defense
  • Tax planning guarantees results

3. Taxable Income

  • Earned income
  • Interest/dividends
  • Capital gains
  • Pension/IRA/Annuity
  • Rent/royalty
  • Alimony
  • Gambling winnings
  • Other income

+ Add Taxable Income - minusAdjustments - minusDeductions x ( timesTax Bracket) - minusTax Credits 4. Adjustments to Income

  • IRA contributions
  • Moving expenses
  • SE tax
  • SE health insurance
  • Keogh/SEP
  • Alimony
  • Student loan interest

minusAdjustments to Income minusDeductions timesTax Bracket minusTax Credits Add Taxable Income 5. Deductions/Exemptions

  • Medical/dental
  • State/local taxes
  • Foreign taxes
  • Interest
  • Casualty/theft losses
  • Charitable gifts
  • Miscellaneous itemized deductions

Add Taxable Income minusAdjustments to Income minus Deductions/Exemptions timesTax Bracket minusTax Credits 6. Tax Brackets Add Taxable Income minusAdjustments to Income minusDeductions times Tax Bracket minusTax Credits Rate Single HoH Joint 10% 0 0 0 15% 8,375 11,950 16,750 25% 34,000 45,550 68,000 28% 82,400 117,650 137,300 33% 171,850 190,550 209,250 35% 373,650 373,650 373,650 7. Tax Credits

  • Family credits
  • Education credits
  • First-Time homebuyer
  • Foreign tax
  • General business
  • Low-income housing
  • Renovation

Add Taxable Income minusAdjustments to Income minusDeductions timesTax Bracket minusTax Credits 8. Two Kinds of Dollars Add Taxable Income minusAdjustments to Income minusDeductions timesTax Bracket minusTax Credits Pre-Tax Dollars After-Tax Dollars 9. Keys to Cutting Tax

  • Earn as much nontaxable income as possible
  • Make the most of adjustments/deductions/credits
  • Shift income to later years if lower-brackets are anticipated

You lose every time you spend after-tax dollars that could have been pre-tax dollars. 10. Avoid Audit Paranoia Percentage of returns Audited 11. Make the Most of Depreciation

  • Divide basis between land and improvements.
  • Assign as much as possible to depreciable improvements.
  • The IRS suggests you use local property tax assessments.
  • You can use any allocation (such as bankappraisal or your insurers estimate of replacement costs) so long as you show reasonable basis.

Land Not depreciable Improvements 27.5 39 years Property 12. Break out Land Improvements Land None Improvements 15 years Land None Components 27.5 years Personal Property 5 years Improvements 27.5 39 years Property 13. Break out Personal Property Land None Improvements 15 years Land None Components 27.5 years Personal Property 5 years Improvements 27.5 39 years Property 14. Personal Property Examples Cabinets Security System Countertops Signage Carpeting Stovetops Dishwasher Supp. Power Microwave Telephone Oven/Range Walls/Partitions PA/Sound Washer/Dryer Refrigerator Window Treats. 15. Repairs vs. Improvements Repairs Improvements

  • Deductible now
  • Depreciable over time
  • Keep property in good operating condition
  • Adapt property to new use
  • Dont add value
  • Add value to property
  • Dont prolong property use
  • Prolong property use
  • Paint
  • Plaster
  • Repair broken windows
  • Fix gutters, floors, leaks
  • Room addition
  • Upgrade appliances
  • Landscaping
  • Replace components

16. Investors vs. Dealers Investors Dealer

  • Buy as long-term investment
  • Buy with intent to resell in ordinary course of business
  • Avoid self-employment tax
  • Pay self-employment tax
  • Depreciation deductions
  • No depreciation deductions
  • Capital gains
  • Ordinary income
  • 1031 Exchange
  • No 1031 exchange

17. Sole Proprietorship Report net income on Schedule C PaySelf-employmenttax up to 15.3% on income Payincome taxon net income 18. S-Corporation Splitproceeds into salary and income PayFICA up to 15.3% on salary AvoidFICA/SE tax on income Salary Income Payincome taxon salary and income 19. Employment Tax Comparison S-CorpSaves $5,184($73,880-$68,696) S-Corp FICA Salary $40,000 FICA $6,120 Net $73,880 Proprietorship SE Income $80,000 SE Tax $11,304 Net $68,696 20. Missing Family Employment

  • Children age 7+
  • First $5,700 tax-free
  • Next $8,350 taxed at 10%
  • Reasonable wages
  • Written job description, timesheet, check
  • Account in childs name
  • FICA/FUTA savings

21. Missing Family Employment

  • Children age 7+
  • First $5,700 tax-free
  • Next $8,350 taxed at 10%
  • Reasonable wages
  • Written job description, timesheet, check
  • Account in childs name
  • FICA/FUTA savings

22. Missing Medical Benefits

  • Employee benefit plan
    • Married: Hire spouse (no salary necessary)
    • Not married: C-corp
  • Reimburseemployeefor medical expenses incurred for self, spouse, and dependents
  • Works with any insurance
    • Use your own insurance
    • Supplement spouses coverage

23. MERP/105 Plan

  • Major medical, LTC, Medicare, Medigap
  • Co-pays, deductibles, prescriptions
  • Dental, vision, and chiropractic
  • Braces, fertility treatments, special schools
  • Nonprescription medications and supplies

24. MERP/105 Plan

  • Written plan document
  • No pre-funding required
    • Reimburse employee
    • Pay provider directly
  • Bypass 7.5% floor
  • Minimize self-employment tax

25. Health Savings Account

  • High deductible health plan
    • - $2,000+ deductible (individual coverage)
    • - $4,000+ deductible (family coverage)
    • Plus
  • Tax-deductible Health Savings Account
    • Contribute & deduct up to $3,000/$5,950 per year
    • Account grows tax-free
    • Tax-free withdrawals for qualified expenses

26. #8: Missing Car/Truck Expenses AAA Driving Costs Survey (2009) Vehicle Cents/Mile Small Sedan 42.1 Medium Sedan 54.0 Large Sedan 65.8 4WD SUV 68.4 Minivan 58.8 Figures assume 15,000 miles/year; $2.30/gallon gas 27. #10: Missing Tax Coaching Service

  • TrueTax Planning
  • Written Tax Plan
    • Family, Home, and Job
    • Business
    • Investments
  • Review Returns

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