Higher taxes are here for successful real estate investors and with more fiscal cliffs and deadlines on the way more hikes are likely to emerge too. The question is how to legally avoid paying more tax than you have to?
It’s not that difficult to find yourself in the top tax bracket when you are investing in real estate. Evading taxes is a big no, no and even if you wanted to stash your cash offshore there are fewer and fewer countries who will consider helping you. So what legal defenses are available for real estate investors wanting to lower their tax burden?
It is surprising to see so many real estate investors still questioning whether they should organize themselves with an LLC or corporation considering the advantages, protections from liability they provide and how inexpensive it is today. This is one of the easiest ways to add another layer of tax protection and write offs.
There are also a variety of other investment vehicles which can help real estate investors to avoid or defer taxes which few utilize. This includes self-directed IRAs and 1031 exchanges. These can take some advanced planning to use effectively but the savings and net boost to returns can be huge.
Even fewer investors pay attention to the impact of where they do business on their net profits. Take a look at Amazon whose head Jeff Bezos is one of the world’s richest billionaires. The firm has a map with red zoned areas which executives are not even allowed in so that they do not trigger adverse tax consequences. How much could you slash in taxes by being more selective about where you invest, advertise and claim your primary residence?
Of course, it also pays to have a great tax accountant. This doesn’t mean real estate investors should just call up the best they can afford when it is time to file with the IRS. It is crucial to have a plan from January 1st and work all year to minimize taxes.