Those that are serious about maximizing their real estate investment returns this year have already begun preparing their taxes. Done correctly, tax time can be a very beneficial aspect of an investor’s business. If you don’t currently have a tax plan for 2014, what is it that you need to prioritize in order to be ready? More importantly, how can you manage your tax situation to gain an advantage in the New Year?
Real estate investors with a great tax plan can easily realize double digit gains in their net annual returns. These dollars also get compounded every year. So for those that haven’t taken taxes seriously in the past, what elements need to be accounted for?
Note: this is not professional tax advice, every individual investor’s situation is different, and a properly appointed tax pro should always be consulted before taking action.
1. Paper Trail
As with any business model, an organized method of maintaining tax records is critical to experiencing a smooth tax season. If you don’t have everything documented, mistakes and audits can wind up being ridiculously expensive. Record everything, use cloud storage and have backups. The more information you have, the better off you will be.
2. Filing Returns
Make sure employee W2s and 1099s get out on time. Adequate preparation will result in a stress-free environment. Even if you don’t have everything together or can’t afford your tax bill, it can be smart to file and ask for an extension. This will help you avoid harassment from the IRS and any fees that may accompany it.
3. Asset Protection & Incorporation
Asset protection and privacy may be increased by choosing the right destinations to incorporate and do business in. This is not a way to ‘evade’ taxes, but the IRS does expect individuals to avoid or do what they can to legally lower their tax liability. Do your homework and make sure you are tapping up to date sources, as the best places to seek lower taxes are constantly changing. One recent report acknowledges South Dakota as one of the top spots for wealthy trusts.
4. Property Taxes
Some real estate investors barely give property taxes a second thought, especially those flipping and wholesaling houses. However, these taxes can be significant and make a massive difference in net returns. In fact, a number of investors have admitted that one of their biggest mistakes last year was not addressing assessed values. In areas like Long Island, it is openly recognized that property tax bills are frequently way overblown. A huge percentage of property owners would qualify for grievances and refunds if they asked.
5. Every Day Expenses
It’s not just the big things that matter. The small, every day purchases and overhead deductions can make a world of difference at tax time. It’s going to be a nightmare to work backwards to try and allocate things correctly or back up returns without receipts. An advanced tax plan for the year can help real estate investors maximize all sorts of deductions and write offs without having to worry about being called out by the IRS.
6. Self-Directed IRAs & 401ks
With all of the buzz that has been made about the benefits of using self-directed IRAs and 401ks to invest in real estate, many have yet to do so. This strategy alone can make double digit differences in returns. Done correctly, this can help investors retain thousands of dollars which would otherwise be allocated to the government. There is no need to keep throwing money away.