Uncle Sam’s Cut: Planning For Your Taxes

Real estate investors who are looking to avoid the typical difficulties that are associated with tax season would do well to learn more about the proper planning procedures. Many taxpayers are actually overpaying and this is a common issue that must be addressed.

The tax laws have been set up to benefit those who invest in real estate. If an investor is not getting the most out of tax season, this is a sure sign that changes need to be made. In order to maximize wealth and avoid onerous taxes, a tax strategist is needed.

The Importance of a Tax Strategist

Once tax season arrives, there is a tendency to go into “woe is me” mode. By taking the time to consult with an experienced tax strategist, a real estate investor can sidestep these tendencies. While many investors have already equipped themselves with a CPA, this is not enough.

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Wealth maximization is about doing everything in our power. There are a wide range of deductions that the average filer is not aware of. There are also several tax codes that investors are missing out. For example, the average CPA is not going to be looking to find every possible deduction.

It is not the CPA’s job to assist their clients when it comes to saving money. The CPA is on hand to help their clients fill out the tax forms and file on time. These are bare bones services that should not be relied upon by experienced real estate investors.

How Can a Tax Strategist Help?

A tax strategist differs from a CPA in a few crucial ways. For starters, they are more likely to offer business that is geared towards helping clients run their businesses. The advice that they provide can be used all year round. It is not all about finding deductions and using tax laws to the client’s advantage.

It is about creating an environment where the real estate investor is able to get the absolute most out of the capital at hand. Capital gains and income tax are the two main areas of discussion. Many investors are completely unaware of their ability to spend less than they are currently paying out.

Related: How to Calculate Taxable Income of an Investment Property in Excel.

In many instances, a tax strategist is able to reduce taxation on capital gains to something that is a bit more minimal. There are some clients who are even able to reduce these costs to zero. All of these tactics are performed in a legitimate manner. The client does not have to worry about any illegal procedures taking place on their behalf.

Arranging Affairs Appropriately

When a tax strategist is looking over their client’s affairs, the first area that is going to be discussed is direct investment. Direct investment can take place with the use of an LLC. A K1 is often recommended as well. An investor who receives a K1 maximizes their write offs and avoids the issues that are associated with depreciation.

Cost segregation is another area that often baffles real estate investors. Cost segregation studies are offered by strategists and allow the client to learn more about their property. From there, the building is broken down into component areas and they depreciate more quickly.

While maximizing depreciation may not seem like the wisest decision, this is a great way to minimize income and lower the amount of taxes that are paid. Lastly, the client will learn more about the necessity of returning capital to themselves and their investors. This process takes place in lieu of distribution.

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Since the money that is being returned has already been invested, a forward thinking investor can essentially give it back to themselves and avoid a number of tax charges. There are no shortage of legal ways to cut down on tax costs and a tax strategist teaches their clients how to arrange their affairs appropriately.

After all, this is not an overnight process. A real estate investor must take the time to prepare themselves throughout the year. While a CPA can certainly fill out the tax forms and file them on an investor’s behalf, they are not going to receive the same benefits that they would from a tax strategist. This is something that all investors need to be bearing in mind going forward.