One of our very, very favorite things about real estate investing? Paying less taxes. It’s kinda the best. 😍
Why? Because taxes HURT, don’t they? We know that they’re a big deal and part of running a country, but we’re also all about reducing our tax liability whenever we can.
We thought so.
When it comes to paying less taxes as a real estate investor, there are a few things you’ll need to understand and then put into practice. Luckily, you don’t need to be a tax expert or an account (heck, we’re not).
The key? Just paying attention to details and learning as much as you can about tax liabilities as a real estate investor. Here’s what you need to know.
Isn’t trying to pay less taxes… illegal 😜😜😜
Wondering if trying to pay less taxes is illegal? That’s a common concern, especially when you hear about politicians and finance bros who have landed themselves in jail for tax fraud (which, yes, is illegal).
See, stepping out on your tax liability and creating loopholes that don’t really exist is 100% illegal.
But, is trying to pay less taxes *the right way* illegal? Heck no.
Making the tax law work for you and for your business is completely legal — and the only reason more people don’t do it is because it seems more confusing than it really is.
Here’s the thing: paying less taxes is, quite simply, smart. It’s not frowned upon, it’s not a bad thing, and it doesn’t mean that you’re doing anything wrong. Promise. Now, here’s how to lower your tax liability and optimize those smart investments you’re making.
The 3-Step Plan to Paying Less Taxes
No. 1 Understand your deductions, and then optimize them.
Real estate investing is RIPE with opportunities for deductions, which can instantly start to offload your tax liability — and easily. The key is just to understand what deductions exist, which ones apply to you, and how you can use them… because when you can use them to your benefit, you can save big. 😎
Here are some of the most common deductions that you may be able to use as a real estate investor:
- Costs from mortgage interest
- Repair costs (which is really effective if you’re an apartment investor)
- Advertising costs related to the real estate investment
- Property tax
- Real estate insurance
- Depreciation, which can exist even when you have positive cash flow
- The pass-through deduction
No. 2 Find an accountant you TRUST.
The best advice we have around paying less taxes? Find someone to do it for you — truly. While you can do your taxes alone, real estate investment tends to make your taxes a messy, long-paper-trail, high chaos kind of issue. If you can find an accountant that you trust, they’ll make sure that you have as little tax to pay as possible at the end of the year.
From benefits you may not have otherwise known about to other little-known deductions, an accountant can streamline your taxes in a quarter of the time that you can — and will almost certainly save you more on your taxes than you’ll pay them in filing fees. Plus, in a nation that’s constantly changing tax rules and laws, it’s always a good idea to hire an expert who is up-to-date on each stage.
No. 3 Re-organize your business structure.
Did you know that the way you structure your business can actually have a big impact on your tax liability? It can — as long as you know how to do it. Different structures have different tax advantages, and different real estate investment businesses can use different structures. Wondering how?
First, you’ll want to consult with an attorney or accountant just to make sure you’re doing everything right. There are a few options, including running your business as a small corporation (which only pay a 21% tax rate) or becoming a S-corp or partnership. The key here is to avoid needing to pay that double tax — good ole’ self-employed FICA — by structuring your business appropriately.
Bonus 〰️ Get A Real Estate Professional Status
For high-income entrepreneurs/investors, the real estate professional status is undoubtedly one of the most powerful tax tools. It can potentially help someone bring their tax bill from 35% down to 15%—or lower. 🤓
Taxpayers who invest in multifamily apartment syndication can use depreciation to reduce their tax burden.
For example, if you show a loss of $50,000 on your real estate ventures, and you made a total of $150,000 from your W2 work, the simple math is that the total amount of income that is taxable is $150,000 – $50,000 = $100,000. Pretty powerful. Not to mention, that could also drop you into a lower tax bracket.
So How Do You Qualify For Real Estate Professional Status (REPS)?
According to the IRS, to qualify for REPS you must meet both of the following conditions:
- More than one-half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
- You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.
This is a bit tricky because you basically need to claim that being a real estate professional is your primary profession. That would simply mean that you would need to spend more hours in real estate than in your W2 job.
Are you ready to boost your own tax benefits and start investing in real estate that truly optimizes your tax bill?
We have you covered with investment strategies and advice that will get you to the land of financial freedom — and less taxes — quickly. 🧐 To find out when doors open next, add yourself to the waiting list here and we can dive in together to see if we’re a good fit for you.
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