Taxes for Business and Real Estate Investing

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Disclaimer: I am not a licensed attorney, accountant or financial planner. The information provided in this article is exactly that, information. You should seek a licensed professional when getting ready to establish your business entity, tax strategies, asset protection and retirement planning.

Tax planning strategies for your business and real estate when utilized properly will save you more money resulting in higher profits and lower expenses. It may seem time consuming for you to maintain good bookkeeping records of your taxes plus the cost of professional services, but the long term benefits of hiring the right individual will be substantial. Even though you are using a professional for your taxes, I highly recommend having a basic knowledge of tax planning.

Keep Receipts and good Records- It won't keep you out of an audit 'per say', however, if you do get a letter or call from the IRS, it will certainly help you to have good records to present your side of the story. We recommend clients keep as many receipts as they can and keep their tax and important business records for at least 6 years. One of the most efficient and effective ways to keep receipts is through the new software and equipment Neat Receipts©. The most important thing is to find a system that works for you and be consistent. (1)

Establishing your entity, type of income generated and the types of assets being held by your business will help you determine the type of tax planning you will need. Each entity has its pros and cons and when it comes to these specific factors, there is a recommended structure for all of them.

S-Corporation- In some instances, clients should actually transfer the ownership of their real estate to an S-corporation. This is in a situation where the taxpayer is considered a "dealer" or "real estate professional," and the sale of the property is short-term in nature and will create a self-employment tax problem. For example, if you are flipping short-term property, building spec homes, completing "short sales" or flipping foreclosure property, the property should really be transferred to an S-Corporation before the sale.

On a cautionary note, please consider three important issues: 1.) Sometimes "due on sale clauses" in your mortgages apply to certain types of transfers, 2.) title insurance policies are generally not going to cover the entity you transfer the property to, but only cover the original buyer; consider a warranty deed to ensure the policy is not terminated, and 3.) transfer taxes may apply in certain states to a transfer of real property. For example, Florida has an onerous transfer tax scheme; in summary, we want to point out that we rarely see "due on sale clauses" as a problem and "title policies" thwarted with a transfer to your own trust or entity. (2)

Another factor that will determine your tax structure as a real estate investor is what type of investor you are. Whether you are a dealer/professional or non-dealer/non professional there are benefits and drawbacks for both. You may want to consider a multi-entity structure depending on the type of business and investment strategies you will engage in. A multi-entity structure when set up properly has great tax advantages.

Owning your own small business is a great tax strategy with many tax deductions to consider. Not every deduction is available for every business owner. You should speak with your professional team to verify what can and cannot be deducted. One deduction I personally like is paying your spouse and kids to do work for your business. I was amazed the first time I saw this diagrammed from our educator at Nouveau Riche. Be sure to keep a record of what your family members are doing in the business so you can show it at tax time.

There is a lot of information on tax planning. It’s impossible for me to type 10% of what is out there. I didn’t even cover that much in this article. I wanted to give you a taste of what is possible. Understanding the concepts will give you enough to get started. Leave the actual work to the professionals and stay informed.

Mark Kohler’s Tax Strategy and Legal Strategy classes were my two favorite at Nouveau Riche’s Real Estate Investment College. He makes it exciting and very easy to understand so you can grasp the basic concepts. You need to have an understanding of these principles before engaging in your business or investing. This information will help you immensely, minimizing your risks and maximizing your profits.

Happy Investing!

Tony



(1) Source – Kyler, Kohler, Ostermiller E-Newsletter March 2008.
(2) Source – Kyler, Kohler, Ostermiller E-Newsletter May 2007.