Investment Property Tax

Depending on the state where you live and also the state where you are investing, the amount of money you will have wrapped up in real estate investing taxes can significantly vary. As the US tax code continues to change and develop every day, there are also many different laws and regulations surrounding investment taxes that will continue to change as well. Part of the best real estate investment strategies includes a plan for dealing with this.

Cut Through the Jargon

Taxes are inevitable, which is why it is so important to understand all of the financial implications of a real estate investment before making a purchase or getting started in the business. You need to know how investment property taxes work in the states where you want to invest. There are also a variety of loopholes and tax breaks that you may be able to benefit from, depending on your specific situation. Doing your research and regularly keeping up with tax laws will help you to stay informed and make better investment decisions.

With years of experience managing a successful real estate business and handling property taxes, I know what it takes to properly manage these rules and regulations. Save thousands using the advice in the following posts.

End of Year Real Estate Mindfulness

2021 is just around the corner.  With all the magic of the holidays, sometimes it is easy to let things slip that you need to button up before January 1, 2021.

We reached out to Karlton Dennis, one of our select speakers for BEC 2021 and a Licensed Tax Accountant. He is the Youngest Forbes Tax Accountant in the US and fully passionate about the tax codes and leveraging it with Real Estate Investors and Business Owners to provide them the strategies that lowers their taxes legally.

Let’s see what Karlton has to say to give us a heads up on what we need to be looking out for now, before our past catches up to us.

————

As we approach 2021, we are reminded of the importance of our end-of-year wealth habits and routines to avoid any unexpected tax scares. This year posed many challenges to investors and small business owners, however, there were many winners that managed to expand during a time of economic contraction.  

Whether taxpayers earned more income or less, one thing will always remain the same, our  taxes will be our biggest burden. So let’s discuss some year-end strategies that can help us  position small based business owners and rental investors to pay less taxes in preparation for  this upcoming tax season.  

Before we go over strategies, let’s address the most overlooked habit and routine, our  bookkeeping! Please be sure your bookkeeping has been executed upon, and is in good standing before you discuss tax strategies with your CPA. In order to leverage tax strategies  before year end, you will need to have your up-to-date bookkeeping numbers in order to  make decisions in real time. Most tax providers provide bookkeeping services that will allow  for you to have a basic profit and loss statement and balance sheet to better help your  accountant determine your potential tax savings based on potential tax strategies. 

Now, for many rental real estate investors, certain strategies can be implemented all the way  until the tax return is filed on April 15th. However some strategies, such as establishing an entity structure, may require you to have implemented prior to December 31st.  

One strategy that can be leveraged all year long, and even past the tax year is the cost  segregation study. You may have heard of depreciation before, but were aware of the ability to  accelerate depreciation? A cost segregation is a tax strategy used by savvy real estate  investors to accelerate depreciation on a rental property to reduce tax upfront, to allow for  additional investing. Sounding good so far?  

Implementing a cost segregation study to accelerate depreciation on a rental property has the  ability to dramatically reduce a taxpayer’s taxable income, and may even reduce all of their tax  liability. Typically this strategy is most effective on residential rental real estate purchased  within the last 10 years, and for commercial real estate purchased within the last 15 years. This  powerful strategy is one of many ways investors can avoid the taxes associated with their  passive income even if they are late on doing their tax planning.  

Now, managing your real estate may not seem fun, but it could lead to a massive tax benefit.  If you are managing your real estate, you are a business owner. By speaking with a tax strategist,  it might make sense to hire yourself, or family members, such as children, as additional employees under your management business. This strategy is a crowd favorite, as many  taxpayers are looking for ways to leverage their investments while involving their children early.  Make sure to speak with your strategist on how to leverage this strategy under the correct  entity structure so you may avoid any additional tax that could arise from hiring your children.

And Last, but surely not least, is the charitable contributions. As a part of the Cares Act  initiative of 2020, eligible taxpayers in 2020 are able to deduct 100% of their charitable contributions on the individual tax returns for the year 2020. So, if you were planning to be  philanthropic this year, understand that the sky’s the limit on your charitable contributions for a deduction in 2020. This has been an unpredictable year to say the least, so be sure to consult  with your tax strategist on any potential changes as you lead up to filing your tax return.  

Good luck Tax Savers!  

Best, 

Karlton Dennis 

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BEC 2021 Goes Virtual During Pandemic

Well folks, we have to acknowledge that COVID-19 isn’t going anywhere…at least not anytime soon. As a result (and as you may have noticed), BEC 2021 will be held virtually, for the first time, due to COVID-19. And, while we are disappointed not to be together in person, we are excited to funnel all our efforts into a virtual networking experience like no other. Seriously. As soon as you sign up, you will start reaping the benefits.

What do I mean? We really had to think out of the box on this one. The big question was: How can we make a networking event successful in a virtual environment? The Best Ever Real Estate Conferences are great because they provide attendees with the opportunity to network with fellow investors and industry influencers from around the world. That is it’s greatest benefit and we know how critical that is to you and your business.

In order to offer all attendees the opportunity to share business strategies, meet high net-worth individuals, and learn something new, we came up with a solution, several in fact, that I think you will love.

We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics. If you want to meet like-minded folks from around the country, if you want to find a partner, deal, or money from the comfort of your home office, or if you just want some good old fashioned new conversations in a world devoid of connections, then this virtual event is a can’t miss.

Exclusive to this year’s virtual event, when you sign up you will be thoughtfully placed into a Mini Mastermind group with your fellow attendees of groups no bigger than 8 people. No other conference provides you the opportunity to connect so intimately and learn as thoughtfully from your fellow attendees this far in advance from the actual date of the event. We’re making the virtual networking easy for you this year. The Mini Mastermind groups start as soon as you sign up, so make it count and register now.

Additionally, in the months leading up the conference, we’re offering all of our ticket buyers free access to exclusive monthly webinars discussing topics such as the current political climate and how the incoming Biden administration‘s decisions on a range of issues could impact the commercial real estate market and industry directly.

So, while 2021 has presented us with challenges from uniting in person, we are going to continue building the essential dialogues and connections in the world of real estate. We are looking at this as an opportunity to expand our network to include those that normally would be unable to attend and offer exciting new elements made possible by the virtual environment.

To find out more about BEC2021, visit www.bec2021.com.

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Residential Lenders Tighten Their Lending Standards – Why This Is Good News for Multifamily Investors

A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).

The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.

“The stock market is inflated” and “real estate prices and rents will not increase forever” they said. 

However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform. 

My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population

Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years). 

Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction. 

Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).

But, sure enough, a study published on June 17th, 2020 projected a decline in homeownership and concluded that  “the demand for rental housing will increase somewhere between 33% and 49%” between 2020 and 2025.

In both my January 2019 article and the June 2020 study, one of the reasons why more people are renting is due to tightened lending standards (other reasons were student loan debt, inability to make a down payment, poor credit, and people starting families later).

A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.

Between December 2012 and November 2019, the MCAI was steadily trending in the positive direction, increasing from the high-80s to the high-180s.

  

However, starting in December 2019, the MCAI began to decline. The three largest drops were in March 2020 (decline of 16.1% to 152.1), April 2020 (decline of 12.2% to 133.5), and August 2020 (decline of 4.7% to 120.9, the lowest since March 2014).

Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared. 

Therefore, by default, more people will be forced to rent.

One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession. 

Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.

To receive the monthly MCAI report, click here.

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What Happens When You Die After 1031 Exchanging Your Whole Life

Imagine this: you acquire your first real estate investment – a value-add duplex for $100,000. After $50,000 in renovations, the new value of the property is $200,000. One year after acquisition, you sell the property for $200,000 with a gain at sale of $50,000. Rather than pay capital gains tax on $50,000, you execute a 1031 exchange into a $200,000 value-add fourplex. 50 years and numerous 1031 exchanges later, you’ve worked your way up to a $20 million apartment complex. Then, you pass away and the $20 million apartment complex is inherited by your children.

Now the question is: will your children be required to pay a capital gains tax upon the sale of the $20 million apartment complex if they elect to not execute a 1031 exchange?

The majority of real estate investors know about the benefits of executing the 1031 exchange strategy. As long as the 1031 exchange requirements are met, you can defer capital gains tax upon the sale of a property. As a result, you have more capital to leverage to acquire more or larger properties.

However, one potential major long-term drawback of the 1031 exchange is the large, lump-sum tax payment at the sale of an exchanged property that isn’t 1031’ed into a new deal. One way to effectively eliminate the requirement to pay taxes on your deferred gains is to continue to 1031 until your death.

Suppose, like the “imagine this” story, that you implement the 1031 exchange strategy until you pass away and the property is inherited by your heir. If the property is a replacement property (i.e., a property acquired with a 1031 exchange) that is inherited from your estate, the replacement property will have a stepped-up basis equal to the property’s fair market value. As a result, the deferred gains are effectively eliminated.

Let’s say you sell your first investment for $200,000 with a $50,000 gain at sale. After a handful of 1031 exchanges, you own a property worth $2 million. If you were to pass away prior to selling the $2 million exchanged property and it is inherited by your heir, the basis is stepped-up to the fair market value, which is $2 million. If your heir decides to sell the property at the fair market value, rather than paying a capital gains tax on over $1.8 million, they won’t have to pay capital gains tax at all.

Therefore, the 1031 exchange strategy is a great legacy building tool. As long as you continue to implement the 1031 exchange strategy until your death, you are allowed to pass on all of your capital gains to your heirs tax-free!

Get organized for tax time with Stessa’s free Rental Property Tax Checklist. Make sure you have everything you need to maximize your deductions and file your return on time. Click here to download for free.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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Trump’s Tax Reform: Current vs. New Tax Law Chart

On Friday, December 22, 2017, tax reform legislation was signed into law by President Trump.

 

After the tax plan was signed, my business partner and I had a meeting with our CPA to discuss tax strategies for both the remainder of 2017 and for the upcoming year. They also provided us with the chart below, which summarizes the key provisions of the new law. I recommend meeting with your CPA to determine how the tax reform will impact your business and what tax strategies to implement to maximize your benefits.

 

2018 tax law

 

Credit: John Werlhof, CLA Roseville

 

Disclaimer: The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

 

How do you think real estate entrepreneurs will be impacted by the new tax reform?

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If you have any comments or questions, leave a comment below.

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Four Strategies to Reduce Your Largest Business Expense – TAXES

 

As real estate entrepreneurs, do you know what is our biggest expense? It’s not resident related expenses. It’s not interest on our mortgage. It’s TAXES.

 

We can strategize to decrease other expenses all we want, but if we really want to make the biggest dent in our costs, we must start focusing on minimizing our taxes.

 

Diane Gardner, a certified tax coach, launched a business with the specific focus of providing tax advice and offering tax planning for real estate investors of all sizes and experience levels. In our recent conversation, she provided four legal ways to reduce our tax bill.

 

Related: How to Save Thousands of Dollars on Your Taxes Via Cost Segregation

 

#1 – Right entity type

 

The first thing you need to do to decrease your tax bill is make sure you are in the right entity type. Many investors, especially beginners, will hold property in their personal names. Not only does this open you up to potential liability issues down the road, but it also opens you up to paying unnecessary taxes.

 

Diane said, “by being able to move [properties] over possibly into a different type of entity, whether it be an LLC, an S Corp, a C Corp, or something along those line, they were able to do some tax planning with that, because we have more to work with at that point.” For example, she said, “we can look into setting up a management company and hiring maybe a spouse to work in that company, and then being able to write off potentially 100% of all your out-of-pocket medical costs.”

 

By being in the right entity, there are a lot of nice tax strategies that will decrease your tax bill, which you wouldn’t have been able to take advantage of by keeping the properties in your personal name.

 

#2 – Automobile deductions

 

Another basic tax deduction are automobile related expenses, which Diane said are often overlooked. “Make sure that they’re taking advantage of all their auto deductions, whether they’re taking standard mileage or they’re actually tracking actual costs.”

 

#3 – Meals and entertainment

 

A third, and also often overlooked tax deduction are meals and entertainment. “How many times are they meeting with potential investors, potential seller, buyers, whatever it might be? Make sure that they’re taking full advantage of that write-off as well.”

 

This includes meals when interviewing potential team members, meeting with passive investors, hosting an annual real estate conference or monthly meetup group, etc. Just make sure you have a conversation with your CPA to determine what is considered meals and entertainment.

 

These first three strategies – right entity type, automobile deductions, and meals and entertainment –  are simple and should be implemented immediately to decrease your tax bill this year.

 

#4 – Hiring family, both children, spouses, AND parents

 

A more complicated, but lucrative tax strategy is hiring family members to work in your business. You may know that you can hire your children to work in your business, but did you know you can hire your parents as well? Diane’s mom has been working in her business for years. It helps lessen her tax burden, but secondarily, it benefits her mother by providing her with extra income while her “dignity remains intact because now [she’s] feeling worthwhile and important again.”

 

Diane said, my mom “needs just that extra little bit each month to make ends meet, so I have hired her to work in my business. She fills out a time sheet, just like all my other staff do. She gets paid an hourly rate. We have her do various things around the office, and in the end, I would be helping her whether it came out of my personal pocket or it came out of my business pocket. But by hiring her to work in my business, I’m able to write off that many, versus I just cut her a check out of my personal account. That’s not a write-off for me.”

 

This strategy is slightly more complicated than the previous three because there is a little more effort and work required. Diane said, “you do want to have a job description and you want to have and keep a time sheet. And you actually have to set them up on payroll. You can’t just give them money and then at the end of the year to do a journal entry and drop this into my books so I can take it off my taxes. You actually have to pay them payroll and withhold the appropriate taxes, and just really make the point that they are a bonified employee, and that you are paying them a reasonable salary or a reasonable hourly wage.”

 

Related: Three Tax Strategies You Didn’t Know About to Save You Thousands

 

Conclusion

 

Taxes are our single greatest expense as real estate entrepreneurs. To decrease your tax bill for this year, implement the following four strategies:

 

  • Make sure you are in the right entity type
  • Take advantage of all automobile related deductions
  • Start logging and writing-off meals and entertainment
  • Hire family members

 

For more Best Ever Blog posts on taxes, click here.

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

 

 

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Three Tax Strategies You Didn’t Know About to Save You Thousands

 

When was the last time your accountant brought you an idea that saved you thousands of dollars in taxes?

 

That was the question that pushed Travis Jennings, who has educated the wealthy on better techniques to improve their finances, investments, and taxes for over a decade, to launch an automated online platform to share the solutions of the top 1 percent with beginner investors. In our recent conversation, he provided three techniques to save thousands of dollars on this year’s taxes.

 

Technique #1 – Rent your house to your business

 

If you create a LLC, then by definition, you are a business owner. As a business owner, there are many different ways to decrease your tax bill. One well known example is deducting the square footage of your home office. However, what most investors don’t know is that they can rent their entire house for business events.

 

Travis said, “let’s say that I threw a pool party and I invited a friend of mine that was potentially going to become a client. Well, as long as we discuss business and we take notes, I get to rent my home to my business for that day.”

 

To determine how much in rent you can deduct, go to a site like Zillow.com, look up your homes estimated monthly rent, divide by 30, and that is how much you can write off for each event. For example, let’s say Zillow says your home could potentially be rented for $3,000 a month. That’s $100 per day. If you host a business event once a month, that’s a $1200 savings.

 

Travis said, “there’s some structure to that. You want to take notes. You want to have [meeting] minutes. You kind of want to briefly write down what you discussed that was business, and just in case one day you ever get audited, you’ll have some proof as to what you did.”

 

I host a monthly poker event with some friends and investors, so I plan on implementing this strategy immediately, and you should too!

 

Technique #2 – Hire your kids

 

Do you have kids? Put them to work and realize even more tax savings. Travis has three kids, and he puts all three to work at his home office. Once your kids turn seven, which is the age of Travis’s youngest, you can hire them.

 

Travis said, “you may have heard of this, but I’m going to give you a twist that’s even more fun. So what if we hired our kids at the 0% tax rate? What if we paid them $6,300 a year? Well, then effectively what we would be doing is shifting dollars off of my tax return and putting it onto their tax return. And if we’re paying them just enough to be in the 0% tax rate, if I’m in the 40% tax rate, I’ve just saved 40%. So on 3 kids at $6,300 a piece, I’ve just saved myself about $8,000 in taxes.”

 

Technique #3 – See if you have the right CPA

 

The biggest mistake a typical real estate investor makes from a tax standpoint is never upgrading accountants. “I would say that most investors – real estate included – don’t start off with the ten million dollar projects,” Travis said. “They build up to it. So then the accounting professional or your tax advisor is typically the advisor that you had in the beginning. I would say that most people don’t grow or they don’t reevaluate their trusted advisors enough. They just roll with what they’re comfortable with.”

 

The CPA that specializes in new development and a standard CPA, for example, have two completely different skill sets. If you have the wrong CPA for your niche, you could be missing out on huge tax savings.

 

A great way to determine if your CPA is the right fit, and if they are capable of getting you the most tax savings, Travis said to ask them “Can you tell me about one of the solutions in the last month or so that you implemented with a different client to save them a bunch of money in taxes?” He said, “if they stutter, if they seem unsure how to answer it, then they’re probably not doing a lot of proactive tax planning.”

 

Related: How to Save Thousands of Dollars on Your Taxes Via Cost Segregation

 

 

Which of these three tax strategies will you implement? Leave you answer in the comments below.

 

Did you like this blog post? If so, please feel free to share it using the social media buttons on this page.

 

Also, subscribe to my weekly newsletter for even more Best Ever advice: http://eepurl.com/01dAD

 

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How to Save Thousand of Dollars on Your Taxes Via Cost Segregation

 

In my conversation with tax expert Jeff Hobbs, he explained a little known and little understood method that is virtually guaranteed to put money in your pocket. The method is called cost segregation, and Jeff explains what it actually is and why every investor should look into the benefits.

 

What is Cost Segregation?

 

Cost segregation is the identification of building components and reclassifying the tax life on each of those components. In a cost segregation study, a building is literally broken down into all of its individual components – all the wood, studs, screws, nuts, bolts, cubic yards of concrete, square yards of carpeting, gallons of paint, etc.

 

Most commercial properties establish a 39-year depreciation schedule, and most residential properties establish a 26.5-year depreciation schedule. However, the IRS assigns a tax-life to each of the individual components. Most components that qualify for accelerated treatments can have their tax life reclassified to either 5, 7, or 15 years:

 

  • 5-year tax-life components: tangible, personal property assets (carpeting, secondary lighting, process related systems, cabinetry, ceiling fans, etc.)
  • 7-year tax-life components: all telecommunication related systems (cabling, telephone, etc.)
  • 15-year tax-life components: land improvements (parking lots, sidewalk, curbs, landscaping, site features like a flag pole or a pond, etc.)

 

Why Would An Investor Use Cost Segregation?

 

Jeff says that the best reason to apply cost segregation is because it puts money in your pocket. For example a typical $1 million asset is going to provide the owner between $50,000 and $150,000 in federal income tax savings. If the study resulted in $80,000 in tax savings and the investor owed the IRS $80,000 in federal income tax, then that just paid 100% of the tax debt!

 

When Jeff engages with a client, he provides a guarantee! For properties that are sub-$500,000, he guarantees a 300% ROI (return based on cost of services). For properties that are over $500,000, he guarantees a 500% ROI. His average client ROI is 1200%. With the typical $1 million building, the $80,000 tax benefit from the example above would cost between $4000 and $7000, depending on asset size, complexity of asset, where it is located, and the documents that the client has available.

 

Are Cost Segregations Always Beneficial?

 

There are only two occasions where a cost segregation study isn’t beneficial. (1) If you are a non-profit organization or (2) you aren’t profitable. In base occasions, you aren’t paying taxes, so getting a tax savings isn’t going to do anything for you.

 

 

Everyone wants to save as much as they can on their income taxes. Therefore, at the very least, it pays to look at what the benefits of cost segregation can do for you. A quick Google search of “cost segregation service in (city)” is the best place to start!

 

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Joe Fairless