By: Jay Long
Q: Dear Jay, I’m having the best year ever. By the end of the year I’ll have closed nine deals with profits ranging from $15,000 to almost $40,000 each. I should break the $200,000 profit mark pretty easy. I bought almost all of the houses this year so I don’t qualify for a 1031 exchange on any of the deals. I’m starting to get stressed over paying the IRS so much money. Do you have any tips to lessen my tax bite? Smoking Hot in Sellersburg A: Dear Smoking Hot, You’re knocking them dead up there! Just so you know it, you’re in the top two percent income category for the entire United States. Most people would kill to have the problem that you do. You’re doing great. To answer your question about paying less in taxes, yes there are several strategies to lessen your tax burden. Some are simple and others can get very complex. They all have to do with how your business is structured. Should you have a c-corp, s-corp, limited partnership, limited liability company or a sole-proprietorship? The answer to this question should be discovered from several long talks with your CPA and tax lawyer. How you decide to structure your business is half tax minimization and half liability protection. I’m going to steer away from giving a specific answer on what to do and say “work it out with your CPA”. Now that I’ve covered my butt on the complicated stuff, let me tell you what I did in a similar situation. My first year in the business I made just shy of $100,000 in cash which was a truckload of money for a 24 year old kid back in 1994. Toward the end of the year, I started calculating how much of that money was going to the IRS and I felt sick. After several phone calls and meetings with other investors and my CPA, I decided to do nothing more than open as many tax deferred retirement accounts as possible and to do the last couple of big profit deals in those new IRA accounts. (The IRA bought them, the IRA sold them and the IRA – not me - got all the profits.) Now the rules on IRA’s have changed a little since 1994 (changed for the better), but the moral of the story is I was able to funnel off over $40,000 of that year’s income into my IRAs. All of it was tax deferred until age 60 and 100% ok with the IRS. My suggestion is to open as many IRA accounts as possible for you and your family. Most of these will reduce your taxable income, and the ones that don’t you should still open, because you could do your last couple of deals in those accounts instead of your personal name (also lowers your income). For example: you could open a SEP IRA (self employment pension), a traditional IRA, a Roth IRA, a Roth IRA for your spouse, and/or a 401k Roth IRA. You could also open Coverdale Education IRAs, one for each of your children and then you could pay your kids a small salary, which also reduces your taxable income, and have them each open a Roth IRA of their own. The rules change each year for how much money can be contributed to each of these different IRAs. The income requirements to qualify for these accounts also change each year. You’ll need to get updated information, but know that this is a very simple and proven strategy to keep more of your money and pay less in taxes. Not only are you saving tax dollars, but you’re also building your and your families retirements and your kids’ college education accounts. You’re going to pay for all of this stuff anyway, might as well pay for it with pre-tax dollars. Jay Long is an expert real estate investor and national speaker. He’s also a licensed real estate broker, author of several real estate courses, seminars and a monthly newsletter, and former vice-president of KREIA (Kentuckiana Real Estate Investors Association). If you would like more information about Jay’s courses, monthly newsletter subscriptions, or if you would like to have Jay speak to you group… contact him at: JAY LONG PO BOX 20025 LOUISVILLE, KY 40250 PHONE (502-893-3313) FAX (502-893-3384) EMAIL Jaylong7@aol.com or www.JayLongInnerCircle.com
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