Thank you Steve 
I work for a big CPA firm that specializes in Real Estate.
First, there is a big difference between tax avoidance and tax evasion. Tax evasion will get you 10 to 15 years. Tax avoiance will save you a lot of money. And tax avoidance is perfectly legal.
Second, seanmathes is correct. Rich people donât pay their share of taxes. I have seen it first hand Many of my firm clients will walk away with millions of dollars in their pocket and pay very little tax. For instance, we have a client who paid tax on $100,000 worth of income, but he took distibutions of over a million! Because Distibutuons (Partnership tax) are generally not taxable. I say general because I donât want to get in this long and drawn out conversaion on basis. If you want to learn more about Basis, view my older post on the taxation forum.
But here is a simple example how it can work for you. Let us say you purchase a rental property for 40k. You create an LLC. Since this is residential real estate you have to depreciate your propery for 27.5 years. That house depreciates at 1454 a year. Remember some expenses like depreciation and amortization are non cash expenses. So lets say at the end of the year you received 12 grand in cash for your rentals and you expended 11 grand in cash for your expenses. You have 1 grand of cash in your pocket. but on your tax return you show an loss because you get to deduct you non cash expenses of 1454 in depreciation. You still have the grand in your pocket but on your tax return you show a loss and pay no tax!
Like i said this is an simple example, but you get the idea.
third, remember every piece of tax code is politically driven. It is used to get votes or intice people or businesses to do something. example, in NY if you own a fleet of trucks and you convert your trucks to a cleaner fuel burning engine. You not only get a tax break, but they will pay for half of the conversion. Here is another, if unemployment is high in the area your offices/warehouse is located. You can get a tax break for every local person you hire.
THE IRS are all for the loopholes, but not loopholes back by not legislated congress.
Finally, getting a CPA is not good enough. Four of my friends are CPAs and they work for BIG 4 Accounting firms, but if you asked them a tax question they will give you that look your dog gives you when you make a high pitch sound. CPAs have specialties. Find a CPA or tax professional with extensive knowledge of real estate and tax.
Hey all,
topnotch has some good points.
I am involved as a shareholder of an LLC that owns a 200 unit apartment complex. I am getting distributions of about 10% cash return on my investment. But there is more depreciation (an expense, although not a cash expense) flowing out of the LLC than there is income. So I pocket the money and the income is offset on the tax return by the depreciation.
After several years ( I figure about 8 or 10) this will slow down and we will sell and start over. If, however, you donât use the 1031 exchange, you will have depreciation recapture to pay because the real estate didnât actually depreciate ( I hope). So the 1031 becomes a vital part of the equation.
Another way that real estate is a great tax avoidance vehicle is that rental income is passive and not subject to Social Security taxes. Depending on wether or not you want to fund your government run retirement plan. This can be a large amount of tax savings for you.
I have always had a hard time believing these conspiracy things. All those rich people and not one big mouth? Or someone who figures that this knowledge is worth something? Or not one of them that just would like to help out their fellow man?
Bottom line is that if you are involved in transactions that generate income, then you avoid taxes to the extent that you can offset the income with expenses. That is the most black and white answer. There are more complex ways that people think up to do better than that, but make sure your accountant and attorney have proof that they will work, I donât like the thought of being the guinea pig to see if the IRS will bite or not. A good CPA doesnât necessarily mean one that will give you the answer you want, it means one that can think creatively and still find the RIGHT answers.
I vote we get rid of all taxes ;D
DB
Amen to that!!! Why donât all real estate investors unite and form a petition to get Congress to stop wasting taxpayer money building bridges to nowhere on remote islands in Alaska and repeal all capital gains taxes? Can you imagine the sonic boom youâll hear with the U.S. economy?
DB,
Have you been a memeber of this LLC since the current owners bought the property or did you buy into it later on? What about refinancing? How you guys thought about refinancing and pulling some cash out?
The LLC was formed in order to build the apartments. I was an original investor and minor shareholder. They are not looking to refi right now, the plan as I understand it is to sell in about 8 years when the depreciation is no longer greater than the income and to take the profit out and 1031 it into more properties. Since I have a minority interest in this one, I mostly just get to watch and accept their decisions. The people that are running it are solid and have done this numerous times, so I am having a good time being along for the ride and getting all I can out of the education.
Take care,
DB
Topnotch,
I have a few questions Iâd like to ask youâŚ
Approximately what percentage of the taxes that are paid in this country are paid by the top 1 percent of wage earners in the USA??
When a person collects a wage or EARNS income does it not get taxed?
What is passive income??
When was the last time a person in a MINIMUM WAGE job hired someone??
Does the small-business person not make the biggest contribution to the general economy that is often overlooked by the people who often are upset with tax law as it is now??
Does a small business not DESERVE a break for hiring someone in a area that has high unemployment??
Do you BELIEVE in the trickle-down theory of REAGANOMICS that has been bashed so unrelentlessly for the last 20 years by Democrats??
When KERRY ran against GW was it fair that when Kerryâs and his wifes tax returns were publicized, nothing was said about his effective tax rate of about 3 percent?? When GWâs was reported he had paid about 10 or 11 percent, and he was raked over the coals, was that fair??
According to IRS code, what is an LLC?? What is it used for??
Just curious to your answersâŚ
Would a flat tax put people like me, tax preparers, out of business, YOU BET!!!
Would I be upset, doubt it because I would be benefitting along with everyone else.
Kevin
Kevin,
I am not going to get in a political debate with you.
I donât have a problem with our tax system. Without it I wouldnât have a job and my Masters In Taxation would be useless! So I am not far a FLAT TAX!
So if you have any questions about real estate and taxation, I am your man. Save the politcs for another forum.
Well this thread got nasty in a hurry. Too bad, there was a lot of information to be gleaned.
The short version:
Get a Tax accountant and a Real Estate Attorney
Find a mentor if you can, if you canât this board is great.
And for the most part none of the tax experts can give you overly specific answers to your question (at least as I understand it) because without more information and knowledge of your situation, the information may be incorrect.
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And if youâre still mad after that nonesensical disclaimer of mine, or you took personal offense at it, allow me to make you some milk and cookies, or buy you a cuppa coffee or tea. Good day and try to smile!
Rebeccah,
I will have to agree with you, it went south in a hurryâŚ
TOPNOTCH,
NOTHING WAS MEANT TO BE PERSONAL, I APPOLOGIZE. I just thought that I had some VALID questions after reading your previous reply. It obviously looks like we are on different sides of the fence, and I donât have any problem with that. I will agree that SOME CPAâS that give tax advice have been wrong. Iâve seen it more than once sitting across the desk from a client. ??? Itâs hard to tell someone that just sat down that a person that theyâve known for a while is wrong. And it usually is a family member.
:banghead:
Do I have a Masters in Taxation, no. Have I learned how to do taxes, yes. Do I deal with Real Estate tax issues, yes. Our owner is a CPA who has owned a tax service for over 20 years. Iâve done my personal and business taxes for about 6 years now. Do I know EVERYTHING about taxes, no and I donât proclaim to.
Iâve found 2 gentlemen who have answered different questions about taxes on this board that are VERY knowledgeable. Both have given excellent answers to questions that have been posted, and I plan on asking them some questions on my own tax return for 2005.
Have a good one,
Kevin