Tax Planning can save you thousands when you have a working relationship with your CPA.
Craig Cody spent 17 years with NYPD chasing bad guys on the streets of New York City. Today, he chases tax savings for real estate investors and small business owners.
Craig recommends that real estate investors stay in regular contact with your accountant. If you act before consulting your accountant, it can cost you dearly.
Tax planning with your accountant can help you reduce the taxes you owe and propel your real estate investment strategy.
For instance, if you sell a building and expect to buy a new building with the proceeds, you may be shocked when your accountant informs you that you owe taxes on the sale of the building.
Regular communication with your your accountant and tax planning could have provided the proper structure to keep you from having “constructive receipt” and owing the tax.
Proper tax planning provides constructive ways to keep more for you. For instance, depreciation is tax free cash that real estate investors recognize when they file their income taxes. Unlike an operating expense that reduces cash flow and Net Operating Income, depreciation is an accounting tool that reduces the taxable income.
If you are a W2 employee, depreciation is something negative you associate with, ie: the declining value of your new car after you leave the dealership.
Unlike a car, real estate is an appreciating asset. When you invest in real estate, depreciation is an asset. You get the benefit of both appreciation and depreciation.
Depreciation is an allowable expense that recognizes the declining life expectancy of a business asset. In real estate, it can be applied in one of two ways; Straight line, or Accelerated. Tax planning will determine which option is available to you.
Straight line depreciation is used most often by passive real estate investors. If the property is a residential asset, ie single family or multifamily, the depreciation schedule is 27.5 years. If the property is a commercial asset, the depreciation schedule is 39 years.
If you are a real estate professional, you are can take advantage of a cost segregation study, and accelerate the depreciation of you property. Cost Segregation breaks the building into components and assigns life expectancy of 5, 10 or 15 years to the components depreciation schedule.
The depreciation is deducted from the the taxable income to reduce the taxes owed.
So, if you are making positive cash flow, the depreciation can lower the recognized income and reduce the tax owed.
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Use your Self Directed IRA to invest in real estate and turbo charge your tax deferred returns.
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The following are the most common questions asked from investors looking to use their 401k to invest in real estate. The questions were presented to Travis Watts from Direct Source Wealth for answers.
Q: What are the benefits of opening a self-directed IRA?
A: Freedom & Choice to invest in the things you want to invest in, ie: large scale real estate.
Q: Why invest in real estate using a self-directed IRA?
A: Opportunity for larger return in a real estate investment that regularly produce higher rates of return.
Q: Can I use a Self Directed IRA to purchase a property I buy for investment?
A: Yes, subject to many rules; ie you cannot personally manage the property.
Q: Can I use a Self Directed IRA to invest in a Syndication?
A: Yes, the most common use of Self Directed IRA funds is investment in syndicated real estate deals. A syndication is a group of investors pooling their funds for investment. The investment is typically larger than one the investor could accomplish on their own. These real estate investments are professionally managed and require that you do nothing.
Q: Is there any tax or penalty to move my current Retirement Funds to a Self Directed IRA?
A: A Self Directed IRA retains the same tax implications as your traditional IRA. You are only changing the custodian from your current provider to another that will allow you to direct the investment.
If you elect to convert your traditional IRA to a Roth IRA, you will be responsible for the tax.
Q: Can I take the distributions?
A: Any distributions from the Self Directed IRA are subject to tax and penalties for early withdraw. A Roth IRA is not subject to tax when funds are withdrawn.
Q: How long does it take to set up a Self Directed IRA?
A: It can take as few as 3 or 4 days if you are currently in cash or it can take a couple of months to liquidate your current positions. Consult with your current custodian and tax professional for your specific timeline.
Q: What documents are required to open a Self Directed IRA?
A: Standard documents; driver license, photo id and social security card, etc.
Q: What documents are required to fund a deal?
A: Standard documents include:
Every deal is different. Check with your syndicator or investment for specifics.
Q: What happens to the investment returns & distributions?
A: Distributions are returned to the Self Directed IRA as cash.
Q: Can distributions be invested in the next deal?
A: Accumulated cash distributions can be invested in another investment.
Summary: Look into a self directed IRA and learn what the possibilities are and remember, learning is earning.
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