Working With Your Tax Advisor, Develop Strategies To Reduce Your Taxes
If you want to maximize the benefits of investing in real estate, craft a proactive strategy for maximizing tax savings and other benefits for your business. Here, I explore each component of the tax return, starting with the federal portion.
Overall Outlook on Tax Rates Wage Income (W-2) Interest Income and Dividends (Schedule B)
- What is the nature of my interest income? Examples would include money market funds (more like a stream of income) or sign up bonuses that banks offer (one-time).
- If the dividends are ordinary dividends, is there an opportunity to switch these to qualified (to pay less tax)?
- How much are you making now and is this a significant portion of my income?
- Do you expect to make more or less in 5–10 years?
Sole Proprietorship (Schedule C)
Assuming the answer is yes to #1, you will want to ask the following:
- What are my current revenue and expenses?
- What deductions am I not taking that I am legally entitled to (i.e. phone, internet, home office, qualified business income deduction, etc.)
- How long do you intend to keep this business? Will it grow in the future or shrink?
- Are there other planning opportunities to reduce taxes such as opening a Solo 401(k)?
Due to the nature of various items with Schedule D, I’ve divided this section into non-real estate and real estate items.
Non Real Estate
- Do you have any mutual funds that have capital gains distributions? If yes, is there another possibility to put money in an asset that has more favorable tax treatment?
- Do you plan to sell any securities in the current or future years? (This is to be evaluated annually).
- If yes to #2, are they short term or long term gains?
Putting It All Together
- How many properties do you plan to acquire in the next 5–10 years?
- Would you like to show more income in the current and/or future years to increase the likelihood of obtaining bank financing?
As shown with all of the different categories of income, deductions, and tax credits, there are many moving parts. In order to truly proceed with your tax strategy, you need an understanding of where you are now and where you are going. From there, you can best plan using the above questions with your tax advisor. Should you want the questions in excel format, feel free to use THIS RESOURCE.
If you have questions on your real estate tax strategy, you can reach me (Aaron Zimmerman) at firstname.lastname@example.org.
Originally published at https://www.straightupchicagoinvestor.com.