DISCLAIMER: THIS IS FOR YOUR INFORMATION ONLY. SINCE I AM NOT A TAX ADVISORY FIRM, I REFER ALL GENERAL TAX-RELATED REAL ESTATE QUESTIONS FROM REAL ESTATE INVESTORS BACK TO THEIR ACCOUNTANTS. HOWEVER, I WILL SAY THAT INVESTORS OFTEN SEEK REAL ESTATE OPPORTUNITIES TO INVEST IN DUE TO THE TAX ADVANTAGES THAT MAY COME FROM DEBT WRITE OFF AND LOSS DUE TO DEPRECIATION.
Karlton Dennis of Karla Dennis and Associates is a tax strategist and business development manager. He was also a featured speaker at this year’s Best Ever Conference. In his presentation, he provided advice about how the wealthiest individuals on the planet are able to stay in the 0% to 15% tax bracket. Below is a summary of his advice.
The two common types of taxpayers
Most employed people in the US fall into one of two types of taxpayers.
The first is the ultra-aggressive taxpayer. The ultra-aggressive taxpayer is by no means an expert on the tax code. However, their mindset is to pay the least amount of taxes as possible (legally, of course).
The other is the ultra-conservative taxpayer. The ultra-conservative taxpayer is the opposite of the ultra-aggressive taxpayer. They don’t want to take any of the deductions they qualify for. They are afraid to reduce their taxes because of bad advice they’ve received in the past, whether it came from something they saw online, in the news, or from a past CPA.
The wealthy are not ultra-aggressive or ultra-conservative taxpayers. They are smart taxpayers. They aren’t like the ultra-conservative taxpayers because they aren’t living in a place of fear. They aren’t like the ultra-aggressive taxpayers because they (or at least someone on their team) have a deep understanding of how to leverage the tax code to the fullest extent.
Four steps to leveraging the tax code
To fully leverage the tax code and write off more expenses, Karlton recommends following these four simple steps.
- You must have a business: You will not be able to take full advantage of the tax code as an individual. You must operate a business. And you must operate the business like a business. This means having a time investment into the business, having a mission and operational strategy, and an expert team and coach.
- Your business expenses must have a business purpose: Once you operate your business like a business, you can write off expenses that have a business purpose. There isn’t a list in the IRS tax code of what you can and cannot write off. If it is ordinary, necessary, and reasonable in the pursuit of income, it can be deducted.
- You must have proof of payments: You must keep copies of your receipts to document what you are spending your money on and to differentiate between personal expenses and business expenses. A good tip is to take a picture of your receipts on your smartphone rather than saving hardcopies.
- You must properly report your expenses: When you are filing your taxes, you must know how to properly report your business-related expenses. This is where your accountant comes into play. The wealthy are not experts on filing their taxes and tax planning. They rely on the experts and focus on operating their businesses.
Common tax mistakes
The most common tax mistakes are simple – essentially the opposite of the four steps above.
Four of the most common tax mistakes are not keeping receipts, disorganized record-keeping, miscategorizing expenses, and being late on your bookkeeping.
These are mistakes because they result in either not fully leveraging the tax code and missing out on deductions or because they spell trouble if you were to get audited.
For example, if you are late on your bookkeeping and do not consistently track your business expenses throughout the year, you are nearly guaranteed to miss out on a deduction. Conversely, you may write off a personal expense accidentally, which could get you into trouble if you were to be audited in the future.
How the wealthy stay in the 0% to 15% tax bracket
The reason why the wealthy pay a lower percentage of their income as taxes is because they have a strategic tax plan. And they aren’t the ones creating this tax plan. They hire the experts.
As a commercial real estate investor, you pay someone else to properly manage your assets, put together a loan, create a private placement memorandum, etc. Taxes are no different. Work with your CPA on tax planning and understanding how to create a tax strategy to leverage the tax code as much as possible.
For more information on how to find a great CPA, check out this blog post.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.