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Are Real Estate Investors Over-Taxed?
Tri Cities Washington real estate investors are a taxed lot! Why is it so? Investors pay more than the required taxes because they do not have a clear understanding of the tax system and how it actually works. Let us try to clear some misconceptions regarding taxes in Kennewick real estate investments.
Buying property in one’s own name invites more taxes. It also can lead to lawsuits and other liabilities, which can be avoided. One tends to lose money even in a successful real estate investment, because of the large percentage paid to the government as gains taxes.
Keeping an eye on the tax system and investing sensibly in Tri Cities Washington, it is possible to:
1. Add $200-$1,000 per month, every month, starting with the next pay check to one’s income from investment.
2. Reduce almost 15.3% in taxes from income coming under self employment, flips and rehabs.
3. Eliminate taxes on capital gain while withdrawing cash, tax free.
4. Utilize IRA funds as a source of tax free capital and increase assets.
5. Eliminate the expense and delays of probate of properties and reduce estate taxes after death.
Real Estate Investment is treated as any other business. Do not overlook deductions and expenses entitled by law. To avoid being over-taxed, all the loop holes in the tax structure should be studied and utilized.
Here are a few areas which can provide relief from real estate taxes:
1. Home office expenses
2. Travel expenses
3. Employment of family members
4. Retirement plans
5. Auto expenses
6. Entertainment expenses
7. Family medical expenses
It is not advisable to invest IRA funds in other business. This is of course being taxed. This money can be used to finance one’s real estate business, where it is not taxable.
The IRS allows for employing kids from the age of 7 in a business. The criteria are that the work should be appropriate for their age and the pay is competitive enough. Employing one’s relatives and children can be helpful in availing tax deductions.
Property placed under a land trust provides asset protection, shields capital gains from taxation, and depreciation is not recaptured on the sale of real estate.
Seek advice from an S Corp for the following problems:
1. The LLC has turned out to be a very popular business entity in recent years. However, if you have an active real estate business; flipping, rehabbing, etc., it results in an increase of 15.3% in extra taxes! These are self employment taxes which should be avoided while still retaining the pass through aspect as well as the asset protection aspect of the LLC.
2. Do not risk getting classified as a “Real Estate Dealer” as opposed to an investor by the IRS. If so, one will no longer be able to write off the property’s depreciation, sell on an installment contract or use a 1031 tax free exchange.
A loss in real estate operations will be shown when these additional expenses are realized and correctly documented. This loss can be written off against the income from one’s regular job or self employed earnings, and a big relief from over-payment of taxes can be achieved!
Call us, 509.438.9344, Email us, or fill out the contact form below.
We respond right away! -Colleen Lane, Realtor®
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