Taxes, Taxes, Taxes — No I'm not cussing, lol. My mailbox was full this week with my property tax bills.
Get this, even though the valuations on some properties decreased, the local governments raised the rates so as to keep the same or increase their revenue. Ouch!
Let's talk about taxes and your real estate business. Every real estate investor should be concerned about paying taxes and looking for ways to reduce or eliminate their tax bills.
As a real estate investor do you realize in the course of your business that you are likely to pay the following taxes:
- Income Tax – Self-Employment Tax
- Income Tax – Capital Gains Tax
- Income Tax – Dividend & Interest Tax
- Property Tax – County & Local Gov't Tax
- Property Tax – School Districts Tax
- Property Tax – Hospital Districts Tax
- Property Tax – Road Tax
- Property Tax – Mud or Water Districts
- Property Tax – Vehicle Registration Tax
- Property Tax – State Real Estate Transaction Tax
- Sales Tax – Items For Rehab
- Sales Tax – Services for Property Maintenance
- Sales Tax – Items For Office
Bet you did not realize how much of your hard work is taxed! That was just what I could rattle off.
Well, as a real estate investor you can run your real estate investing activities just like any other business and recoup some of these taxes back in other ways.
It may require you to keep up with current tax laws, use an accounting system like Quickbooks and spend some time tax planning. But guess what? There are bookeepers and local accountants that would appreciate the business of saving you money.
Tax Saving Strategies for Real Estate Investors
If you have long term holdings, rental properties, lease-option residences, seller-financed homes and even land in your portfolio, first and foremost review your property bill.
Have your realtor run comps or jump on zillow.com for a quick estimate to see if you are valued at a the correct amount.
Property taxes are the #1 or largest expense that eats into your monthly cash flow. Protest those bills if they are incorrect or you feel their is an error.
Also, be sure factor in your new property tax expenses in your new lease rates and send out a new escrow analysis for your seller-financed properties.
Here is a list of the different ways that, Small Business Advice For Today's Economy in their recent blog post , recommends as great tax saving strategies:
- Reduce your tax liability by hiring family members to carry out work in your business. Pay your children and spouse to perform assigned duties. This way you can shift from higher tax rates to lower ones.
- Hiring independent contractors instead of employees. You will save on payroll taxes. However ensure that you meet the IRS’s criteria.
- You can take advantage of tax deductions allowed for charitable donations. Make donations in November or December instead of January so that you can include the donations for tax deductions in the current year.
- You can maximize your expenditure on equipment and office supplies. Buy in advance for a quarter and use the tax deductions allowed in the current fiscal year.
- If you pay all bills due before the end of the year. Payment to cell services, rent, insurance, and utilities related to the business can be included for accounting and applicable tax waivers.
- Take some of your profits and setting up a retirement plan. Make payments from your profits before the end of the year. This will reduce your income for the year and proportionately the tax due. Be sure to check on the limits. Plan a feasible and beneficial strategy with your accountant.
- Be sure to deduct from your taxable income money paid to licensing fees, businesses taxes, and annual memberships to businesses related organizations.
- Be sure to deduct interest paid on private lender borrowings for running the business and related fees.
- Insurance premiums paid to insure the business office and machinery are eligible for tax deductions.
- Make a list of your real estate investing clubs & memberships and check which ones are eligible for tax deductions.
- Check whether you have deducted management and administration expenses as well as money spent on maintenance and repairs of equipment.
- Decide whether you should use a cash accounting system or accrual one Which one will benefit your business the most? Keep in mind that the tax deductions are different depending on the system you use.
As real estate investors, we can retain much of our profits & wealth with a little beneficial tax planning and organizing our business to minimize tax expenses.