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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.”
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
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.