Monthly Archives: November 2016

Never Pay Taxes on Your Real Estate Investment

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Real estate can be a great investment, especially with all of the tax benefits. You can generally deduct interest, property taxes, repairs, and depreciation. Sometimes, a rental property may even generate a tax loss, while being cash-flow positive. But what happens when you sell your property?

If you sell your property as a loss, then you may be able to deduct the loss against your other income. Hopefully, you will have a gain when you sell your property, and you can reinvest the proceeds into another property. The flip side is that if you do have a gain, then you will end up paying Federal and possibly state income taxes.

There is a way out from not having to pay any taxes on the gain of your real estate transactions. It’s called a section 1031 exchange. A 1031 exchange allows you to postpone paying taxes on the gain if you reinvest the proceeds in a similar property.  You will not have to ever pay any taxes on the exchanged property unless you sell it outright.

For example, let’s say that you own a small multi-family rental property that you are looking to sell so that you can purchase another rental property. The final sales price of your rental property is $400,000, which represents a gain of $150,000. Between Federal and state taxes you may end up owing approximately $50,000, for example, on your sale. But, if you located a property and properly executed an exchange, then you will not owe any income taxes on the transaction until you sell your newer property.

It sounds simple, but you must adhere to several important rules to make it work. First, when you sell your original property you have 45 days to find a replacement property.   The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary.  Next, the replacement property must be received no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Ultimately, you must work closely with your attorney, realtor, accountant, and a qualified intermediary for the outcome to be as successful as possible.

Also, 1031 exchanges are actually quite common with vehicles. Trading in your vehicle for another is considered an exchange as well, but the rules are more stringent, whereas cars are not like-kind to trucks.

Frivolous Tax Arguments

I don’t know anyone who likes to pay taxes. But, you won’t win with these arguments:

Filing tax returns are voluntary: Filing tax returns are not voluntary.  The IRS uses the word voluntary to mean that you determine your own initial tax liability by filing your own tax returns, and not have the government determine your liability for you. Actually, if you do not file a tax return, the IRS will give you notice, and may eventually file a “substitute for return” and assess a tax liability. This is fairly common.

Filing tax returns are not constitutional: All you need to do is read the sixteenth amendment. Actually, it is not a bad idea to read the constitution every so often anyway. There are many court cases that support this.

The Internal Revenue Service is not an agency of the United States: The Secretary of the Treasury has full authority to administer and enforce the internal revenue laws and has the power to create an agency to enforce such laws.

If you want to minimize your tax liability, there are many legal ways, otherwise there are penalties and possible criminal prosecution if you try to make these arguments.

Where is all of the Money Going?

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You’re a small business owner, keeping busy, but there always seems to not be enough cash.  An entire book can be written on this subject, but here are a few reasons why you may feel your business is short on cash:

Taking too Much: Unless you have other income sources, you need to either take distributions or a paycheck from your business to live. The problem arises when you take too much and leave the business cash-starved.

Paying off Debts: If you have business debt from loans or credit cards, it can create a cash drain. Even if your business is showing that you have made a profit, you may not have much cash to show for it. This is because only the interest paid actually shows up on the profit and loss statement.

Collections: If you don’t actually collect the money from customers then it is the same as never having made the sale. Actually, it is worse because you have spent your time and incurred expenses.  If this is an ongoing problem, then you need to modify your collection procedures.

Grow the Business Profitably: Every business needs to grow every year as expenses usually only increase.  If the business needs more cash and you do too, then you need to grow both your sales and profits.

These ideas may seem simplistic, but they are extremely powerful. They all relate on the importance of using your financial information, a.k.a. boring accounting stuff, to run your business better.

Smart Ways to Cut Your Expenses

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A previous article was titled, “Don’t Cut Your Expenses,” and this time I am going to give examples of cutting expenses in a smart way.

Personal Expenses: With mortgage rates at record lows, now may be a good time to refinance your existing mortgage. You need to compare the savings with any upfront costs. If you can cut the length of the mortgage, this is the better way to go.

Delay major purchases, such as a new car or gigantic television. A car payment, along with insurance, gas, and maintenance can become a large percentage of a person’s income. If you can delay the purchase, you can save each month towards a larger down payment. The same applies to a TV, which should be paid for without having to use credit.

Business Expenses: Generally, if an expense can be reduced, without reducing quality or other necessary benefits, then it is worth investigating further. A perfect example is that you may be able to get a better deal by switching phone or Internet providers and save money.

Review insurance policies, such as health and liability coverage with your agent or broker. You want to make sure that you are receiving the coverage that you need with a good rate. As a caveat, make certain that you have the proper amounts and types of insurance so that you are covered adequately.

There are other advanced ways to save money and sometimes they even require upfront investments. This can include investments in technology, managing employees better, and even tax planning.