Real Estate Investors Powerpoint 2010
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Tax Strategies For Real Estate Investors - 2010 Version
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Real Estate Investors Powerpoint 2010
- 1. Tax Strategies for Real Estate Investors Tom Sawyer, CPA Sawyer & Latimer, P.A. www.sawyerlatimer.com 954-491-7233
- 2. The “Secret” to Beating the IRS “There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that.” William H. Rehnquist 1. Tax planning is financial defense 2. Tax planning guarantees results
- 3. Taxable Income + Add Taxable Income - minus Adjustments - minus Deductions x (times Tax Bracket) - minus Tax Credits • Earned income • Interest/dividends • Capital gains • Pension/IRA/Annuity • Rent/royalty • Alimony • Gambling winnings • “Other” income
- 4. Adjustments to Income minus Adjustments to Income minus Deductions times Tax Bracket minus Tax Credits IRA contributions Moving expenses ½ SE tax SE health insurance Keogh/SEP Alimony Student loan interest Add Taxable Income
- 5. Deductions/Exemptions Add Taxable Income minus Adjustments to Income minus Deductions/Exemptions times Tax Bracket minus Tax Credits Medical/dental State/local taxes Foreign taxes Interest Casualty/theft losses Charitable gifts Miscellaneous itemized deductions
- 6. Tax Brackets Add Taxable Income minus Adjustments to Income minus Deductions times Tax Bracket minus Tax Credits Rate Single HoH Joint 10% 0 0 0 15% 8,375 11,950 16,750 25% 34,000 45,550 68,000 28% 82,400 117,650 137,300 33% 171,850 190,550 209,250 35% 373,650 373,650 373,650
- 7. Tax Credits Add Taxable Income minus Adjustments to Income minus Deductions times Tax Bracket minus Tax Credits Family credits Education credits First-Time homebuyer Foreign tax General business Low-income housing Renovation
- 8. Two Kinds of Dollars Add Taxable Income minus Adjustments to Income minus Deductions times Tax Bracket minus Tax Credits Pre-Tax Dollars After-Tax Dollars
- 9. Keys to Cutting Tax 1. Earn as much nontaxable income as possible 2. Make the most of adjustments/deductions/credits 3. Shift income to later years if lower-brackets are anticipated “You lose every time you spend after-tax dollars that could have been pre-tax dollars.”
- 10. Avoid “Audit Paranoia” Percentage of returns Audited 0.40% 0.40% 6.90% 1.90% 1.20% S-Corp Partnership Schedule C: $100,000+ Schedule C: $25,000-99,999 Schedule C: $0-24,999
- 11. Make the Most of Depreciation • Divide basis between “land” and “improvements.” • Assign as much as possible to depreciable improvements. • The IRS suggests you use local property tax assessments. • You can use any allocation (such as bank appraisal or your insurer’s estimate of replacement costs) so long as you show “reasonable basis.” Land Not depreciable Improvements 27.5 – 39 years Property
- 12. Break out Land Improvements Land None Improvements 15 years Land None Components 27.5 years Personal Property 5 years Improvements 27.5 – 39 years Property
- 13. Break out Personal Property Land None Improvements 15 years Land None Components 27.5 years Personal Property 5 years Improvements 27.5 – 39 years Property
- 14. Personal Property Examples Cabinets Security System Countertops Signage Carpeting Stovetops Dishwasher Supp. Power Microwave Telephone Oven/Range Walls/Partitions PA/Sound Washer/Dryer Refrigerator Window Treats.
- 15. Repairs vs. Improvements Repairs Improvements •Deductible now •Depreciable over time •Keep property in good operating condition •Adapt property to new use •Don’t add value •Add value to property •Don’t prolong property use •Prolong property use Paint Plaster Repair broken windows Fix gutters, floors, leaks Room addition Upgrade appliances Landscaping Replace components
- 16. Investors vs. Dealers Investors Dealer •Buy as long-term investment •Buy with intent to resell in ordinary course of business •Avoid self-employment tax •Pay self-employment tax •Depreciation deductions •No depreciation deductions •Capital gains •Ordinary income •1031 Exchange •No 1031 exchange
- 17. Sole Proprietorship Report net income on Schedule C Pay Self- employment tax up to 15.3% on income Pay income tax on net income
- 18. S-Corporation Split proceeds into “salary” and “income” Pay FICA up to 15.3% on salary Avoid FICA/SE tax on income Salary Income Pay income tax on salary and income
- 19. Employment Tax Comparison S-Corp FICA Salary $40,000 FICA $6,120 Net $73,880 Proprietorship SE Income $80,000 SE Tax $11,304 Net $68,696 S-Corp Saves $5,184 ($73,880-$68,696)
- 20. Missing Family Employment Children age 7+ First $5,700 tax-free Next $8,350 taxed at 10% “Reasonable” wages Written job description, timesheet, check Account in child’s name FICA/FUTA savings
- 21. Missing Family Employment Children age 7+ First $5,700 tax-free Next $8,350 taxed at 10% “Reasonable” wages Written job description, timesheet, check Account in child’s name FICA/FUTA savings
- 22. Missing Medical Benefits Employee benefit plan – Married: Hire spouse (no salary necessary) – Not married: C-corp Reimburse employee for medical expenses incurred for self, spouse, and dependents Works with any insurance – Use your own insurance – Supplement spouse’s coverage
- 23. MERP/105 Plan Major medical, LTC, Medicare, “Medigap” Co-pays, deductibles, prescriptions Dental, vision, and chiropractic Braces, fertility treatments, special schools Nonprescription medications and supplies
- 24. MERP/105 Plan Written plan document No pre-funding required – Reimburse employee – Pay provider directly Bypass 7.5% floor Minimize self-employment tax
- 25. Health Savings Account 1. “High deductible health plan” - $2,000+ deductible (individual coverage) - $4,000+ deductible (family coverage) Plus 2. Tax-deductible “Health Savings Account” - Contribute & deduct up to $3,000/$5,950 per year - Account grows tax-free - Tax-free withdrawals for qualified expenses
- 26. #8: Missing Car/Truck Expenses AAA Driving Costs Survey (2009) Vehicle Cents/Mile Small Sedan 42.1 Medium Sedan 54.0 Large Sedan 65.8 4WD SUV 68.4 Minivan 58.8 Figures assume 15,000 miles/year; $2.30/gallon gas
- 27. #10: Missing Tax Coaching Service True Tax Planning Written Tax Plan – Family, Home, and Job – Business – Investments Review Returns
Editor's Notes
- Let’s say your S corporation earns the same $80,000 as your proprietorship. If you pay yourself $40,000 in wages, you’ll pay about $6,120 in Social Security. But you’ll avoid employment tax on the income distribution.And that saves you $5,184 in employment tax you would have paid without the S-corporation.
- Let’s assume you’re a sole proprietor and you’ve hired your husband. The plan lets you reimburse your employee for all medical and dental expenses he incurs for himself – his spouse (which covers you) – and his dependents. This includes all the expenses you see listed here. Major medical insurance, long-term care coverage, Medicare, and Medigap insurance. Co-pays, deductibles, and prescriptions. Dental, vision, and chiropractic care. Braces for your kids’ teeth, fertility treatments, and special schools for learning-disabled children. It even covers nonprescription medications, vitamins and herbal supplements, and medical supplies. The best part is, this is money you’d spend anyway, whether you get a deduction or not. You’re just moving it from a nondeductible place on your return, to a deductible place.
- You’ll need a written plan document, which we can provide you. You’ll need to track your expenses under the plan, which we can also help with. But there’s no special reporting required. You’ll report reimbursements as “employee benefits” on your business or real estate return. You’ll save income tax and any self-employment tax you would otherwise owe on that income.There’s no pre-funding required. You don’t have to open a special account, like with Health Savings Accounts or flex-spending plans. You don’t have to decide how much to contribute, and there’s no “use it or lose it” rule. It’s just an accounting device that lets you characterize your family medical bills as business expenses.You can reimburse your employee or pay health-care providers directly. Let’s say your husband needs to pick up a prescription. He can use his own money, and you can reimburse him. Or he can use a business credit card and charge it to the business directly.If you have non-family employees, you have to include them too. You can exclude employees under age 25, who work less than 35 hours per week, less than nine months per year, or who have worked for you less than three years. Non-family employees may make it too expensive to reimburse everyone as generously as you’d cover your own family. But, if you’re offering health insurance, you can still use a Section 105 plan to cut your employee benefit cost. You can do it by switching to a high-deductible health plan, and using a Section 105 plan to replace those lost benefits.