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Tax Strategies
for Real Estate Investors
Tom Sawyer, CPA
Sawyer & Latimer, P.A.
www.sawyerlatimer.com
954-491-7233
The “Secret” to Beating the IRS
“There is nothing wrong with a strategy to
avoid the payment of taxes. The Internal
Revenu...
Taxable Income
+ Add Taxable Income
- minus Adjustments
- minus Deductions
x (times Tax Bracket)
- minus Tax Credits
• Ear...
Adjustments to Income
 minus Adjustments to Income
 minus Deductions
 times Tax Bracket
 minus Tax Credits
 IRA contr...
Deductions/Exemptions
 Add Taxable Income
 minus Adjustments to Income
 minus Deductions/Exemptions
 times Tax Bracket...
Tax Brackets
 Add Taxable Income
 minus Adjustments to Income
 minus Deductions
 times Tax Bracket
 minus Tax Credits...
Tax Credits
 Add Taxable Income
 minus Adjustments to Income
 minus Deductions
 times Tax Bracket
 minus Tax Credits
...
Two Kinds of Dollars
 Add Taxable Income
 minus Adjustments to Income
 minus Deductions
 times Tax Bracket
 minus Tax...
Keys to Cutting Tax
1. Earn as much nontaxable income as possible
2. Make the most of adjustments/deductions/credits
3. Sh...
Avoid “Audit Paranoia”
Percentage of returns Audited
0.40%
0.40%
6.90%
1.90%
1.20%
S-Corp
Partnership
Schedule C: $100,000...
Make the Most of Depreciation

• Divide basis between “land” and “improvements.”
• Assign as much as possible to deprecia...
Break out Land Improvements

Land
None
Improvements
15 years
Land
None
Components
27.5 years
Personal Property
5 years
Im...
Break out Personal Property

Land
None
Improvements
15 years
Land
None
Components
27.5 years
Personal Property
5 years
Im...
Personal Property Examples
Cabinets Security System
Countertops Signage
Carpeting Stovetops
Dishwasher Supp. Power
Microwa...
Repairs vs. Improvements
Repairs Improvements
•Deductible now •Depreciable over time
•Keep property in good
operating cond...
Investors vs. Dealers
Investors Dealer
•Buy as long-term
investment
•Buy with intent to resell in
ordinary course of busin...
Sole Proprietorship
Report net
income on
Schedule C
Pay Self-
employment tax
up to 15.3% on
income
Pay income
tax on net
i...
S-Corporation
Split proceeds
into “salary”
and “income”
Pay FICA up to
15.3% on salary
Avoid FICA/SE
tax on income
Salary ...
Employment Tax Comparison
S-Corp FICA
Salary $40,000
FICA $6,120
Net $73,880
Proprietorship SE
Income $80,000
SE Tax $11,3...
Missing Family Employment
 Children age 7+
 First $5,700 tax-free
 Next $8,350 taxed at 10%
 “Reasonable” wages
 Writ...
Missing Family Employment
 Children age 7+
 First $5,700 tax-free
 Next $8,350 taxed at 10%
 “Reasonable” wages
 Writ...
Missing Medical Benefits
 Employee benefit plan
– Married: Hire spouse (no salary necessary)
– Not married: C-corp
 Reim...
MERP/105 Plan
 Major medical, LTC, Medicare, “Medigap”
 Co-pays, deductibles, prescriptions
 Dental, vision, and chirop...
MERP/105 Plan
 Written plan document
 No pre-funding required
– Reimburse employee
– Pay provider directly
 Bypass 7.5%...
Health Savings Account
1. “High deductible health plan”
- $2,000+ deductible (individual coverage)
- $4,000+ deductible (f...
#8: Missing Car/Truck Expenses
AAA Driving Costs Survey (2009)
Vehicle Cents/Mile
Small Sedan 42.1
Medium Sedan 54.0
Large...
#10: Missing Tax Coaching Service
 True Tax Planning
 Written Tax Plan
– Family, Home, and Job
– Business
– Investments
...
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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. 1. Tax Strategies for Real Estate Investors Tom Sawyer, CPA Sawyer & Latimer, P.A. www.sawyerlatimer.com 954-491-7233
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 27. #10: Missing Tax Coaching Service  True Tax Planning  Written Tax Plan – Family, Home, and Job – Business – Investments  Review Returns

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