My Tax Saving Strategies

My friend did better than ever financially last year. He found a solution that allowed him to write off most of his income but also allowed him to qualify for all the loans he applied for. It’s like having your cake and eating it too. With this one strategy, my friend was able to write off $320,000 and ended up getting a $3,500 refund check while still qualifying for a home loan for over $1 million!

 As you begin to create massive wealth, you must learn to preserve it from being taken by Uncle Sam. The aim of this article is to give you an overview of some of the amazing ways you can save big-time on your taxes. All of this is done in a way that is legal, moral, and ethical. Remember, I am not an accountant, and some of these tax laws may have changed, so please consult your accountant before taking action. These are some of the best ways I have found to save on my taxes.

Start a Real Estate Business

One of the best ways to save on taxes when your real estate business starts making at least $30,000 a year is to form an S corporation. An S corporation allows you to avoid having to pay hefty self-employment taxes. If you’re still working a W-2 job, you can write off not only business expenses but also the income from your W-2 salary, a total game changer for a lot of people.

Pay Your Kids

If you have children, you can pay each child up to $12,000 a year for working in your business, and it’s a tax write-off for you. They should be old enough that it passes the smell test of actually being able to do something. It’s a double bonus because you can teach your children work ethic, get them involved in the family business, and teach them how money works. For instance, my oldest son, Hyrum, works for me, and he pays all my bills, fixes things on my computer, and even runs numbers for deals. I will often take my other children to a fix-and-flip property right before I put it on the market to do some yard work. They pick up any garbage so the house looks great. Instead of having your children work for minimum wage, why not have them help you in your business and pay them well for their participation? It’s a win for everyone!

Retirement Accounts

Retirement accounts can be an absolute game changer for tax savings. There are several different write-offs you can get now, including long-term write-offs if you do deals within your retirement account. If you want to go this route, you will need to learn all the rules and regulations for using your retirement account so you do not get into trouble.

Self-Directed IRA

At the time of this writing, you can contribute $5,500 per spouse or $11,000 for a family to an annual, self-directed IRA. This means you can get up to an $11,000 write-off. Or you can make it a Roth IRA and pay some taxes up front. With this method, you can then conduct real estate deals through the Roth IRA account without paying taxes.

Solo 401(k)

You can self-direct your 401(k) if it’s not invested by your current company. You can learn how to roll it over to become self-directed. If you make a high income, you could contribute as much as $56,000 and your spouse could also contribute $56,000. That’s a total of $112,000 in retirement account money. You are able to either get an immediate write-off from this, or you can turn the account into a Roth and you’ll avoid paying taxes on all the deals you do within it. It’s a process that feels magical and allows for peace of mind.

Depreciation and Cost Segregation

Perhaps the most powerful strategy is depreciation and cost segregation. This strategy can only be employed by individuals who spend at least 750 hours a year (fourteen hours a week) in real estate or trade businesses.

Here’s an example of how this strategy works. Let’s say you find and buy a rental for $400,000. You can then have a study conducted on that rental that segregates five-year, seven-year, and fifteen-year assets, based on how long it takes for those assets to wear out. For example, five- and seven-year assets might include paint, carpet, some of the plumbing, some of the electrical, and so on. Anything that can be classified in one of these categories can qualify for a bonus, and you can take all the depreciation as a bonus in year one. What this equates to is that ultimately about 25 percent of the purchase price of a rental can be written off in the year it is rented out. In this scenario, you can get a $100,000 write-off. A friend of mine wrote off as much as $320,000.

 One of the most powerful aspects of this strategy is that typically writing off all your income disqualifies you for bank loans, but this is not the case with cost segregation! They actually count the amount you segregated toward your total income. Thus, despite a $320,000 write-off, my friend was able to qualify for a $1 million mortgage for his dream home!

Real estate investors get so many perks and can often write off most of what they make. You can creatively take advantage of tax-saving strategies such as forming an S corporation and paying your children. You can also set up retirement accounts and cost segregate your properties. These and many more strategies could really save you from major hurt during tax season.

In the next email, we’ll look at the final strategy for building and protecting your empire: how to thrive in a down market.

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