Experimented real estate investors know that finding (and buying) the right property is only the first step in a long process of buying a asset that increases in value and generates income. Once you get that dream investment, you need to manage it, improve it, and just as importantly, develop a comprehensive tax strategy to protect your profits from Uncle Sam.
Don't worry - it doesn't involve burying money in your garden or transferring it overseas. These are simple and perfectly legal ways to structure your investments and your cash flow to take advantage of the many built-in benefits that the tax code offers to real estate investors.
1. Change your income
For tax purposes, there are three types of income: earned income, passive incomeand investment income.
Earned income (also called ordinary income) is the money you earn from a business, a job that delivers a Form W-2, or self-employment. This is how most people make most of their money, but it is also taxed at a higher rate than the other two types of income.
Passive income is money earned from cash investments such as rental properties, dividends from REITs or a number of other sources. Depending on its source, this money is usually taxed at a slightly lower rate than earned income, and you can reduce your passive income tax liability through methods such as flow-through entities.
Investment income is the profit you make by selling a property for more than what you paid for. This is taxed as capital gains, which come in two forms: short term and long term.
Short-term capital gains are the result of selling a property that you've owned for less than a year, and these capital gains are taxed at the same rate as regular earned income. Long-term capital gains, however, are assessed when you sell a property that you have owned for more than a year, such as in a buy and keep strategy and are taxed at a much lower rate than regular earned income (0%, 15% or 20%).
Once you start making real estate investments, you will have the option of converting your income to lower tax types, whether that is by collecting rent through an LLC or using a 1031 exchange (described below) to defer capital gains. The bottom line is that the further you can move away from regular income and start earning passive income or investment income, the lower your tax liability will be, even if you earn more money.
2. Unleash the power of Exchange 1031
Let's say you complete a real estate sale. You are fill in your seller's net leaf, and it looks like you're going to make a net profit - until you get to capital gains. Capital gains taxes can drastically reduce your investment profits, which is why most investors want to avoid them. Fortunately, there is a way to defer these capital gains taxes indefinitely.
The 1031 exchange is a semi-obscure tax code provision that essentially allows real estate investors to "swap" one property for another and defer capital gains taxes on the sale.
It works like this: once you've sold your initial property, you have 180 days to transfer that money to a new property. You can buy a single new property or multiple new properties as long as they are in addition to the proceeds of the sale, and there are few restrictions on what type of property you can upgrade to.
For example, if you are selling a single-family home, you can use a 1031 exchange to reinvest that money into a multi-family rental, a condo you are considering renting or even commercial property. You will need to use a specialist intermediary to orchestrate the actual exchange, but as long as the transaction takes place within the required time frame, you will be able to defer all capital gains taxes.
Real estate investors value 1031 exchanges. In addition to the tax benefits of using a 1031 exchange, the transaction also contains some innate financial benefits. In particular, the tax-advantaged nature of 1031 exchanges allows you to maximize your compound interest by removing the tax drag seen on the payment of capital gains.
Just like investing in stocks, you would pay taxes on every sale and over the course of a decade or more, the total value of your nest egg would translate into a smaller amount than it avoided. If you can defer taxes and only pay them on the back-end to the disposal (sale), you build up equity in a property. This allows you to keep that capital and achieve long-term appreciation.
You can also use 1031 exchanges over and over to defer capital gains through multiple upgrades to your holdings. The advantage of this is clear; let's say you go from a single family home to a duplex to an apartment building to a large commercial property, and every time you've used a 1031 exchange. When you finally sell that property and your income tax bill capital gains matures, you will take a much smaller hit, proportionately, than if you should have paid on the first or second sale.
If a 1031 exchange looks complex and labyrinthine - most of them require the assistance of a real estate lawyer - the arrangement should not scare you. Running a 1031 exchange doesn't require the expertise of an entire legal team to extract all the savings.
Instead, you can navigate the tax code yourself or use one of the many online options available. These companies, the technical term is "qualified intermediary", make an 1031 exchange easy and affordable.
3. Trade deductions
It seems obvious, but many non-investors don't understand how much Tax deductions be available to you once you own real estate.
These deductions include:
- Property management fees (many property management services charge up to 10% of rents, so this can be a considerable deduction)
- Real estate repairs and capital improvements
- Marketing and advertising spending
- Legal or professional fees (this includes accounting fees)
- Mortgage interest
Property taxes and insurance premiums for an investment property (they cannot be deducted from your personal residence)
As you can see from this list, these are significant costs that can add up quickly. You will probably need a voucher tax expert to take full advantage of all the deductions available to you, but it's worth it.
4. Manage properly
Speaking of finding a good accountant, this is an area that can stumble a novice investor's learning. how to start investing money. Creating accounts and finding the right person to manage them is one of the less exciting parts of being an investor, but doing this right can pay huge dividends when April 15th rolls around.
To avoid receiving a high bill from your accountant, negotiate your fees in advance. This will avoid the unpleasant surprise of a surprisingly high bill. Additionally, you should ask your accountant to commit to some sort of agreed framework to clarify what you can expect to pay.
Additionally, for any service you hire, you should also do some comparison shopping to see who got the best reviews and who is offering the best rates. A little time invested up front can save a lot of time and money in the long run.
If you decide to use a property management company to take care of your rentals, be sure to follow the same guide: find out exactly what they charge and how much you're going to pay.
Use taxes to your advantage when investing
The tax strategy doesn't sound as exciting as a new investment strategy, but it can have a huge impact on your returns. Converting your income streams into more beneficial types of income, using 1031 exchanges to defer capital gains, maximizing your business deductions, and finding and foreclosing reliable tax accountants and property managers all help to maximize the value of your long-term investment in their own way.
If you can tick all four of these boxes, you'll be surprised how much more of your income is left in your pocket - and how much less goes to the IRS.
This message was previously published on youngandtheinvested.com.
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About six months before I turned 50, a friend tried to convince me to enter a physique contest. He had just turned 40, and was thrilled to be in the over-40 category because there were fewer guys for him to compete against. He said to me, “Kirk, you can win the over-50 category. There are only a few guys who enter. But, you have no lats or traps—most older dudes don’t. Work on your back and you got it in the bag ! ” I wasn’t too excited to enter a competition with “no competition, ” but I was pretty peeved to hear him say I had no lats or traps. My back was better than that. Although I had no intention to enter the competition, I started doing more single-arm dumbbell rows to work my back. Now, a few years later, it’s one of my favorite dumbbell exercises. Importantly, I’m not trying to break any records when it comes to weight here, like I might have in my younger days. Quality reps at low weight is the bigger focus.
There are variantes of the exercise where you see guys use a bench for support, using a hand or even placing a knee on the bench. These have their merits ( although MH fitness director Ebenezer Samuel, C. S. C. S. would rather you not put a knee up ). However, I mostly do the version with no assistance from the bench with both feet on the ground as points of contact. This version works your traps, rhomboids, rear delts and rotator cuff groupes musculaires, but you also get some core work, something you greatly need as you get older. Remember, though, that the way do the exercise is subjective to your own abilities. If you need some extra support for balance, don’t hesitate to put a hand down.
to set up for my preferred variation, pick up a light dumbbell, especially to start. Stand with your feet in a parallel stance about shoulder-width apart. Hold the dumbbell in a neutral position at your side, as if you would for a hammer curl. Place your free hand behind you, with the back of your hand on the small of your back ( you can also extend your off arm out to balance ). Next, bend over by pushing your butt back and hinging at your waist, with your knees slightly bent. There should be no rounding of the spine, and you should keep your gaze down at the floor in a neutral neck place. Lastly, as you’re hanging onto the dumbbell with your arm pointing to the floor, squeeze your shoulder blades together so your shoulders lock in place and don’t slump.
From this starting position, use your back to pull the dumbbell up without twisting your spine. Pull up as high as you can, pause for a moment at the top and squeeze your shoulder blades together even more. Then release by lowering the dumbbell back to the starting place. tera control my pace, I usually pull up for 2 seconds, squeeze at the top for 2 seconds, then release back to the starting position in 2 seconds.
By doing the dumbbell row unilaterally ( one arm at a time ), you’ll feel yourself being pulled off balance. You must fight with your abs and obliques to maintain balance and stability, which is why I love this exercise so much. Although you won’t be able to load up with as much weight as you would using the bench for stabilization, the extra core work you’ll get makes this version well worth putting in your arsenal of exercises. Try 4 sets of 8 to 10 reps during upper body workouts to get started.
We all know that it’s common for men to skip the doctor until they become sick, injure themselves or are faced with a serious health problem. And a majority of men will postpone seeking care for a few days to see whether they feel any better. It’s the whole ' if it ain’t broke, don’t fix it ' line of thinking.
But there are steps the men in your life can take today to improve their vitality and help prevent health problems down the road. Of course, there are some things that can’t be changed, such as family history and age, but every day choices can have a big impact on their current and future health.
Eating a diet that’s low in fat ( less than 7 percent of kcal should come from saturated fats ), cholesterol, and salt, and packed with fresh fruits and vegetables ( two cups of fruit per day; three cups of vegetables per day for men up to age 50 and two and a half cups for men aged 51 and over ), whole céréales and fiber can help improve your health, prevent heart disease, diabetes and certain cancers.
Try to get 30 minutes of moderate physical activity on most days of the week. Taking a walk, jogging, swimming and mowing the lawn all count. But don’t be a weekend sports warrior. Start slowly if you aren’t normally active and gradually build up. No time ? Research shows that even bermuda bursts of physical activity—as few as 10 minutes of intense activity several times a day—can help men improve their health. Talk to your doctor about the right exercise program for you.
It’s important to maintain a healthy weight. Excess weight, especially around the waist, can be on your body. Carrying too much body fat forces your heart to work harder and increases your chances of heart disease and stroke, even if you have no other risk factors ! So, try to curb weight gain as you age.
Tobacco smoke contains more than 4, 000 chemicals and is a known cause of cancer. Smoking also increases the likelihood of high blood pressure, heart disease, lung problems and other health problems. And if you think chewing tobacco is safer, think again. Not only is chewing tobacco a known cause of cancer ( carcinogen ), it also contributes to gum disease and tooth loss and may be linked to fertility problems. And, few could argue that chewing and spitting is attractive to a partner. If you smoke or chew, talk to your health care professional about ways to quit. Consider nicotine replacement therapy products that include self-help programs, if appropriate.
Whether it’s pulling out the weed whacker, going for a bike ride or grilling with the neighbors, safety is key. Here are just a few examples : Take care when moving heavy objects. It’s easy to strain yourself when lifting boxes, furniture and other heavy items. Use your knees and legs and not your back for leverage. And ask for help, if you need it. Wear appropriate protective gear for your eyes and ears when using leaf blowers, lawn mowers and other machines at home or work. Excessive exposure to noise is the most common cause of hearing loss. Wear a helmet when you ride a bike or ski and throw on reflective clothing if you go for a run after dark. When grilling, never leave the grill unattended, especially when small children and pets are around, and keep a fire extinguisher handy. The grill should be at least 10 feet from your house or any building. tera protect your skin, avoid prolonged exposure to the sun and apply ( and reapply ) sunscreen with an SPF of 15 or greater that provides protection against UVA and UVB rays.