So many of us are sick and tired of hearing news reporters talk about the problems with today’s health care, and even worse is the political commentary on what should and shouldn’t be fixed.
In fact, with all of the confusing sound bites, arguing and rhetoric in the media today, it’s hard to believe there are any real solutions that could positively impact our personal lives. However, I believe there are strategies that can work! Your personal plan does not have to be a mess…there are options!
The Health Savings Account is one of the most powerful pieces of a well designed health care strategy. It includes saving money, saving taxes, building a tax-free ‘bucket’ for health care and most importantly taking control of your own health care strategy.
1. The Tax Deduction. Your HSA contributions are deductible from your gross pay, or business income, on the front page of your tax return. This gives you a powerful tax deduction and can potentially even put you into a lower tax bracket. In 2016, the tax deduction is up to $3,350 for singles and $6,750 for families. In 2017, the tax deduction is $3,400 for singles and remains the same for head of household and married couples at $6,750.
2. The Deadlines. There are two important deadlines. First, you have to enroll in a high-deductible health insurance plan (HDHP) before December 1st in the year you want the deduction. So for example, if you want the write-off in 2017, make sure you have the right type of plan in place by December 1st, 2017. Second, you can make the contribution and take the deduction up until April 15th following the year you want the deduction. For example, you can open the account AND make the contribution before April 15, 2018 and get a write-off for 2017.
3. Tax free growth. The funds grow tax-free and aren’t a “use it or lose it” plan. The HSA account grows and builds for your future healthcare needs. Investments aren’t counted towards contributions either. Win big on investing with your HSA and still ‘pass Go’ every January and make another contribution.
4. Tax Free withdrawals. You can also spend the money tax-free on qualified medical expenses. This could be deductibles, dental, eye-care, chiropractic, acupuncture and even hotel and lodging while at the hospital. The list is quite exhaustive and comprehensive. Moreover, you can start taking out money immediately and there’s no waiting period. Just change the way you normally approach your health care spending. For example, stop at the bank and make a deposit in your HSA on the way to the doctor. Then pay the bill out of your HSA visa. You just generated a write-off the same day. Check out IRS Publication 502 for a list of the hundreds of medical expenses you can pull out of your HSA tax-free.
5. Self-direct your HSA Investments. You can even “self-direct” your investments inside your HSA. This means you aren’t simply stuck with a mutual fund option provided by your bank. You could invest in a restaurant, real estate [YES! Real Estate! Let us show you how!] or even super bowl tickets. If you want to self-direct, just place your HSA funds with a ‘custodian’ that allows for self-directing rather than with your local bank.
6. An HSA can help pay for your retirement. After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses, and then pay federal income taxes on it. The HSA then acts much like a traditional IRA since the HSA holder pays ordinary income taxes on non-medical related withdrawals, with the added perk that you don’t have the mandatory disbursements usually required by traditional IRAs. This protects you from the concern I often hear “What happens if I don’t need the money for health care”? The simple answer is, don’t worry- you can use it like an IRA in the future.
7. How to set-up an HSA? Remember, the insurance is completely separate. Get the right type of insurance that qualifies you and then DON’T CALL your insurance company for an Health Savings Account…they don’t administer them- they just sell insurance. Once you have the insurance, the easiest is to open up an HSA at your local bank. You can sometimes even do it within minutes on line. No major paperwork. Just check the proper boxes, sign the form and make a deposit. Most Bank HSAs will then give you a Visa card to pay for medical expenses right out of your HSA. However, if you want to ‘let the money ride’ and invest the HSA and not pull out money for medical expenses immediately- for example “self direct” (see item 5 above), then you would open up your HSA with a self-directed IRA custodian. At our law or accounting office we can give you a list of choices.
Bottom line, the HSA is one of the most under utilized tax strategies by Americans today. Even President Trump in his Inaugural Address mentioned the HSA by name and stated it need to be a larger part of any changes to the health care legislation. It’s a fantastic tax savings strategy as well as a powerful tool to help pay for current and future health care costs. Everyone should at least consider the HSA as an option when purchasing insurance and saving for taxes.
I talk to many clients that think buying an Umbrella Insurance policy is a “no brainer”. I don’t know if I completely agree with that belief and think it’s important business owners understand what they are paying for and actually getting.
Yes…its very affordable, and so for many they think “the annual premiums are so cheap and if it gives me any additional protection or peace of mind- why not?” However, lets talk about that ‘additional protection’ you think you are getting.
Excess not ‘Gap’ coverage
Many people think that umbrella insurance is great coverage because it will ‘fill in the gaps’ and cover me if my regular auto, home owners or rental insurance doesn’t cover me- WRONG. Umbrella insurance is built to be there for ‘excess’ claims that might exceed your regularly insurance policy. Moreover, the umbrella policies oftentimes have very specific provisions that it won’t pay out any benefits until primary policy in place has been exhausted.
Example. You have insurance on one of your rental properties and mold is discovered. Regrettably, our owner policy doesn’t cover the claim, so you think you can rely on your umbrella policy to come to your rescue- Don’t count on it! The umbrella policy doesn’t cover the gaps in your standard policy, only the claims that might exceed it.
Another way of saying it is that your umbrella policy works in ‘concert’ with your other liability coverages (say even an uninsured motorist blindsides you)…your primary insurance may cover the injuries caused by this driver up to a point, but then the umbrella policy takes over when your other liability limits have been reached and covers any excess claims.
What are we actually trying to protect?
Many think an LLC or Corporation is all we need to protect ourselves or our assets from our business operations or rentals. However, that’s not what I’m talking about here. Yes we need to have entities and good asset protection to protect us from our business ventures or the tenants in our rentals, however think about liabilities that don’t involve your business.
Look from a different perspective for a moment. Think of a lawsuit or cause of action that could take away your business. This is liability that isn’t created by your business, but by your personal actions! I call this type of liability “Outside Liability”– Exposure created outside our business that could allow a creditor to take our business or rental property away from us.
Many consider this a unique approach to asset protection because they have never heard it explained in this manner. However, I want you to know this exactly is how courts and judges view asset protection when a creditor is going after assets, and many misunderstand the true methods to protect their assets.
Let me share an example that may bring this home. Recently, I had a client get in a car accident that was clearly his fault (texting and driving). Another driver and passengers were seriously injured and the claims are going to be in the hundreds of thousands, if not over a million.
What makes the situation more precarious is that my client owns a successful business, a few rental properties and a personal home (with equity in it- believe it or not).
To be honest, the case is far from settled, but we are carefully re-assessing his asset protection plan. Regrettably, he and his wife had not taken asset protection that seriously in the past because “they didn’t think it would happen to them”. This is exactly the time an Umbrella Policy would be of great help to my clients. Hopefully, his auto insurance will cover the initial claim, but it’s a good chance the claims could exceed policy limits. That’s when the umbrella insurance could kick in and cover the excess claims. We’ll see what happens in this case and situation, but the jury is still out (no pun intended).
Here is another look at the power of Umbrella Insurance with a video I produced on YouTube:
The truth is that umbrella insurance can be one of the most affordable forms of asset protection and should be one of your front line defenses. However, I want to ask of you to really drill down and interview your insurance agent to make sure you understand the boundaries of YOUR policy and what it actually covers.
Again, it’s such an affordable option to complement a good asset protection plan at a cost on average of $300-$500 a year for $1M to $2M of coverage, so don’t ignore it. Without umbrella insurance, you could be obligated to pay out of pocket for legal fees, medical bills, and damage expenses that exceed the limits of your underlying primary policies.
Bottom line, have an annual review with your attorney regarding all of your asset protection techniques and exposure and implement the most affordable plan expanding it as your assets grow.
This is a very important area of employment law, and far too many business owners cut corners in this area and don’t think it’s a big deal- IT IS a big deal. How you classify a ‘worker’ in your business, whether as an employee or sub-contractor, can have far reaching effects to you AND your business.
I understand the business owner’s plight. Many entrepreneurs are wary of the costs and extra paperwork to bring on an ‘employee’ in the business. Terms such as SUTA, FUTA, FICA and Workers Compensation will often times deter the employer into making the ‘right’ decision, and it could ultimately be devastating to their business.
Bottom line, some business’s try and treat their “employees” as “sub-contractors” and 1099 them rather than set up payroll and follow the proper procedures when hiring an employee.
The IRS consistently warns taxpayers that if they are caught paying ‘employees’ as ‘sub-contractors’, they will pay stiff penalties on top of the taxes and interest owing for payroll withholdings that should have taken place.
Also, what happens if one of your employee gets hurt on the job picking up a delivery or even slipping and falling at your workplace? Can they make a Workers Comp claim that comes to your rescue to pay the medical bills? No. Because you don’t have Workers Comp! You treated them as a sub-contractor and so now you face personal liability and the piercing of the corporate veil because you were negligent in your management of the business and employment practices. This could actually be far more devastating than an audit because claims for medical costs or pain and suffering could easily exceed a tax or penalty.
There are facts and circumstances most commonly used to determine the difference between an employee and sub-contractor. It’s a subjective analysis and some facts may indicate that a ‘worker’ is an employee, while other factors indicate that the worker is a sub-contractor. Thus, you need to weigh the issues with your tax or legal advisor to make the right decision and what path you’re going to take.
Here are the 3 most common factors or categories to analyze are as follows:
The old adage regarding a duck couldn’t be more appropriate. If it looks like a duck, quacks like a duck and walks like a duck- It’s a duck! Same thing with employees. If they act like an employee, are treated like an employee and are paid like an employee- they are an employee!
The Employee Definition: The IRS and State Workers Compensation Agencies essentially define an employer/employee relationship as one in which the employer controls the workspace, the hours worked, the equipment to be used and directs the daily and weekly activities of the worker.
A Sub-contractor by contrast is one that typically carries their own tools, supplies, bills for their time and/or services, controls their hours worked and serve multiple customers or clients and aren’t supervised or directed by one employer in particular.
Bottom line, if they are an employee…deal with it and get the proper paperwork and procedures in place. You’ll be far better off in the long run. PLEASE be careful and make sure you discuss this issue with your CPA and attorney when hiring a worker that may be falling within this grey area. This is not a situation you can ignore or take lightly.
Every week, if not every DAY, one of the attorneys in my office is asked this question in a consultation: "How many properties should I put in my LLC?"
We take this seriously and have to think….Do we want to rip off our client, or give them the answer that is in THEIR BEST interest?
A lot of workshop gurus and ‘coaches’ working out of cubicles in Nevada (supposedly under the guidance of an attorney) will recommend an LLC for EVERY rental. I truly believe this is NOT needed for the far majority of real estate investors. It’s expensive, cumbersome and provides nominal benefit to many clients that just don’t have a lot of equity in their rentals….yet!!
Is there a limit on how many properties you can put in an LLC?
No. You can put as many properties as you want into an LLC…but then we have gone to the other extreme. I don’t want to see my clients with 10 or more properties sitting in an LLC and effectively ‘putting all of their eggs in one basket’.
Yes, if you have one LLC for each property, if there is a problem with tenant or contractor, they can’t break out of that LLC and get to other rentals (so long as they ‘maintain’ the LLC).
But don’t forget the cost!!
However, on the flip side with a bunch of rentals in one LLC, if there is a problem with one rental, they can get at the other 9. So much cheaper…but where is the happy medium and we NEED to be balanced…as in most areas of our lives.
It comes down to Equity, Location and Types of Rentals
In my opinion, the heart of the issue is the amount of equity you have in each one of your properties, where they are located and which properties have the most risk of a potential lawsuit
I’ve always said it comes down to “quality”, not “quantity”. If you have a bunch of low-income housing rentals that cash flow, but don’t have a lot of equity, throw 5-7 of these properties in the same LLC. If there is a problem, YOU are protected, and will a plaintiff want to chase down some measly equity in some low-cost rentals- not usually…in fact, VERY rarely.
But if you have a golf course rental, a multi-unit rental, or commercial rental with some significant equity, that property may very well deserve its own rental. Another way of saying it is to keep your “high equity properties” separate from your “high-risk properties”.
Next, we often find it more affordable and simple ‘group’ properties in LLCs by State, and potentially have a separate LLC for each bundle of properties in every State. This can make banking, foreign filings fees and Registered Agent fees more efficient to manage and save some administrative costs.
Finally, if you DO have properties in multiple states, if the Series LLC is available in that State, it can dramatically increase your protection for a nominal cost.
Finally, this ‘consideration’ and issue is the perfect topic to discuss in an annual ‘asset protection review and strategy session’ with your business attorney. If they don’t bring this topic up to you, or have the ability to help you in multiple states, you have the wrong lawyer.
But no matter what you do…DO NOT rely on some ‘coach’, online service, or real estate sales company for your legal advice on this topic! Oh….but that’s right, if you get into a lawsuit I’m sure they carry malpractice insurance and will stand behind their advice if there is a problem – NOT!!
Ok…so the real name of an IRA that can be used for education expenses is called a Coverdell Education Savings Account (Coverdell ESA). However, for simplicity sake, we in the accounting world generally refer to these powerful little gems as the “Education IRA”.
Regrettably, not everyone in the accounting world believes the Education IRA to be a precious gem. Mostly because they don’t understand their hidden benefit and strategy. Thus, in my opinion, the 529 college savings plans are oversold to the public and no one really talks about the Education IRA.
Let me set the record straight and share what I think to be one of the most incredible ways to save for college education. First, the good news:
The Hidden Strategy. The little known fact that can transform your college savings account/Coverdell ESA/Education IRA into a powerhouse for college savings is the fact you can self-direct the investments. Hence, you can use leverage and sometimes make a small investment that can pay enormous returns and in turn accelerate your college savings account very quickly.
What is a Qualified Education Expenses? Essentially, this term means tuition, fees, books, supplies and equipment required for study at any accredited college, university or vocational school in the United States and at some foreign universities. However, the money can also be used for room and board, as long as the fund beneficiary is at least a half-time student. Off-campus housing costs are covered up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes.
In summary, many a parent understands the seriousness and stress ‘college savings’ can place on a family. However, just as a retirement savings plan, the best strategy is to just start saving now, and in my opinion, start self-directing your Education IRA as soon as possible to reap the highest possible rates of returns. As a parent with 3 kids in college this year, let me encourage you to take this seriously and just get started with something and don’t give up.
As many of you know, I recommend to ALL of our clients to purchase at least one rental property a year for tax planning and wealth building benefits. It doesn’t have to be big, but at least something. I have created these “10 Steps to Purchasing Your First Rental” as a guide for many of my clients that are new investors. I hope this may even help some of you that are seasoned investors.
HERE is my AMAZING, yet SIMPLE list:
1. Make a Goal.
Set a deadline to purchase your first rental. Stay committed. Let friends and family know your goal. Write it down and set short deadlines to be looking at property and making decisions, rather than just ‘buy rental by X date’. Set more manageable goals to get you to closing.
2. Start Shopping.
Just get out and start looking at rentals. Engage two or more realtors or investors in the markets you are looking at to send you leads and options. Once you start looking you’ll get more motivated and the juices will start flowing.
3. Get a Spreadsheet.
Develop a spreadsheet, even if you have to buy one OR create one, to analyze your properties. This should set forth criteria to ‘rate’ your possible properties by rent rates, operating costs, debt service, property management, etc.. and create an ultimate ROI or Return on Investment calculation.
4. Look at lots of Property.
Take your time and look at lots and lots of property. There is NO RUSH. I have told clients time and time again, there will always be a deal next week. Follow your gut and don’t get sucked into a deal you don’t feel good about.
5.Make an Offer and Start Due Diligence.
Once you find a property that ‘fits the bill’, make an offer contingent on due diligence. If you don’t like the deal…get out. Don’t get emotionally attached to the transaction.
6. Do more Due Diligence.
Look at the property from every angle. Learn how to do good due diligence. Read books and talk to others on nightmare experiences so you can look for any possible problems. Be patience, but DON’T GET discouraged.
7. Open Escrow.
Once your happy with your due diligence and the property looks like a winner, start reviewing docs, move to closing and begin forming an LLC. In MOST states I will always recommend an LLC to hold your rental. Get a consult so we can discuss the matter and help review docs if necessary. Don’t do your first deal on your own.
8. Close and Deed the Property to an LLC.
Don’t stress about closing in your own name or having the LLC finished before closing. There are only a few states where this is important to consider. When we have a consult, we’ll indicate if there is going to be transfer tax problem later. Don’t worry about the ‘due on sale clause’ when deeding to your own LLC. The bank is worried if you transfer the property to someone else after closing, not if you just transfer it to your own entity or trust.
9. Track Expenses.
Keep track of everything for tax purposes. This includes the closing statements, costs you incurred BEFORE you closed and expenses after. Everything related to the purchase and management of the property is a tax-write off. Look at the list at the end of my new CPA book if you need some ideas as to what might be a write off.
10. Manage the property, Tenant AND your Property Manager.
In summary, don’t think this property will run by itself. Stay involved. Take lots of regular pictures. Keep good records on your tenants, and your property manager if you are using one. Visit the property regularly.
With all of these risks and steps to take, I still feel strongly this can be one of the the secure paths to retirement. With the power of leverage and using the bank’s or other people’s money, you can increase your net-worth dramatically. Don’t rush…take your time and realize it’s not a sprint, but a marathon.
From my perspective, travel is one of the most underutilized tax deductions by small-business owners today. I try to make all of my travel a business write-off by following a few simple rules. Unlike meals and entertainment, which are predominately limited by 50 percent, travel expenses are 100 percent deductible. Travel expenses include:
1. Hold the annual company meeting. If you have a corporation, this would be your board of directors meeting and shareholders meeting. If you have an LLC, elect a board of advisors to assist the manager or managers of the company. This is an excellent opportunity to discuss the company’s operations over the past year: profits, losses, acquisitions, new ventures and goal-setting. Listen to the advice of your board members and make plans for the following year.
2. Visit a client. Wherever you are traveling, is there a customer or client in the area? Could you cultivate a new relationship or strengthen a current one? Schedule meetings each day you are traveling, at least for a few hours, and keep notes of what you accomplish and why the meeting was important.
3. Visit a vendor. Is there a vendor or supplier, subcontractor or affiliate you could meet with where grandma or grandpa lives? Could you negotiate new pricing, tour a facility or talk about networking and how you could work more closely together? The tax write-off may even be simply a bonus when you consider the business that you could generate with a strategic meeting that ultimately would boost your revenue.
4. Attend a conference or workshop. Look at possible workshops in the local area where you are visiting. Consider tax, legal, business, marketing website, SEO, customer relationship or technical training or classes based on your type of business. At the very least, visit a local real estate or investment club meeting if possible. The training could be fantastic and justify a great write-off to boot.
5. Check on your rental property. I’ve said it time and time again. At least consider and/or attempt to purchase rentals where you travel. More specifically, could you buy rentals where extended family members live? Have them help manage your properties or simply work on them while you are visiting. Sometimes, it’s a great excuse to get out of family functions to have to leave and work on the “rental” — just saying.
The list goes on and on. It just doesn’t make sense for any business owner not to have at least some travel expenses. With all of these strategies or reasons for business travel, make sure that you are doing substantive business on each day you aren’t traveling and keep records of what you are doing, whom you are meeting with and how it relates to your business.
YEAR END TIP: Plan your holiday trips accordingly and incorporate one of the five reasons above into your travel plans.
As usual, the more money you make in your business, the more opportunity you have to be aggressive and take a larger deduction. Don’t get greedy. Keep your receipts and records, and discuss the expenses with your CPA at the end of the year in order to report a well-balanced tax return. As I have said many times before, “Pigs get fat and hogs get slaughtered.”
Every holiday meal has the potential to be a dining expense. Meals are another highly underutilized expense by small-business owners and should be a healthy line item on your tax return. However, many don’t realize how creative and detailed they need to be in order to maximize this write-off.
We truly can and should involve more business discussions in our dining engagements. Why not have a business discussion during your holiday meals with people that are working with you in your business, whether they are family or not?
Here are three options for writing off dining that should get your creative juices flowing and tantalize your taste buds:
Option 1: Dining with others (limited by 50 percent). This holiday season, make sure to incorporate food into some of your year-end meetings with partners, vendors or customers. If you’re talking business, you can deduct up to 50 percent of the dining costs. Why not consider having some of those important meetings over dinner during the holidays and take a write-off? Have you held this year’s board of directors or board of advisors meeting yet? Go to dinner and take some good notes, called “annual minutes.”
Option 2: Office drinks and treats (no percentage limitation). Don’t forget to document all of those sodas in the fridge, the water cooler, doughnuts or bagels on Fridays, the coffee and tea in the kitchen, etc. Any food you buy for the office to provide convenient snacks your employees (not the owners or their families) is 100 percent deductible. The reasoning for this special rule from the courts and the IRS is that these items will help your employees be more productive and stay in the work place, rather than leave the premises for a drink or a snack.
YEAR END TIP: Stock up on snacks and drinks in the office for 2017. Purchase them before year-end and get the write-off in 2016.
Option 3: Lunch or company party at the office with employees (no percentage limitation). Recent tax court cases and IRS rulings have only further substantiated this powerful tax deduction. Make sure your accountant doesn’t put the company party on the “dining” line that is typically subject to the 50 percent cut. These food expenses are a 100 percent write-off!
The important consideration with this strategy, in order to comply, is that the majority of the attendees to the party are bonafide employees and not owners or their family members. For those you with substantive businesses and payroll, this could be an excellent deduction to take advantage of during the holidays.
YEAR END TIP: Have your company holiday party catered rather than take the employees out to lunch.
All of these items can add up to be a significant expense on your tax return. Keep good track of these expenses and set up several categories in your QuickBooks to organize the variations that can occur among these items. If you don’t track them, you’ll have nothing to discuss at tax-prep time. We can always whittle down a deduction if it’s too high, but it’s much harder to dig one up.
Bottom line: Travel and dining during the holidays can be a fantastic tax deduction and a great impetus to have productive meetings with your board of directors, vendors and employees to make plans for the New Year.
There are many options that one can invest their money in. Today, Grant Cardone, International Sales Expert and Contributor on Entrepreneur.com, shares with us "8 Ways Real Estate Is Your Smartest Investment".
Inflation is defined as, “a general increase in prices and fall in the purchasing value of money.” Your money doesn’t go as far -- simple. The $30k you made at your job 10 years ago and lived comfortably with barely gets you by now. You can’t control inflation (the Federal Reserve does that) and the government has doubled their debt since 2008. It’s now at $18.3 trillion and grows every day.
The government cannot save you or your family, or ensure your financial freedom. Set your mind right about earning money. More cash = more freedom! Money itself won’t make you happy, but it will give you the ability to provide a better life for yourself and your loved ones. You must invest with income streams that give you positive cash flow, learn to leverage your debt, learn to handle inflation and take control of your physical assets.
Do you currently have commercial real estate assets in your investment portfolio? Are you scared to have your money in the stock market (like I am) but also fed up with almost no return on investment with your money at the bank? Do you instinctively like the idea of being invested in income producing real estate with results you can see?
Here are eight reasons why investing income producing real estate is an excellent choice for protecting and growing your wealth:
1. Positive cash flow.
One of the biggest benefits to income producing real estate investments is that leases generally secure the assets. This provides a regular income stream that is significantly higher than the typical stock dividend yields.
2. Using leverage to multiply asset value.
Another important characteristic of commercial real estate investing is the ability to place debt on the asset, which is several times the original equity. This allows you to buy more assets with less money and significantly multiply asset value and increase equity as the loans are paid down.
3. Low-cost debt leveraged to multiply cash flow.
Placing “positive leverage” on an asset allows for investors to effectively increase positive cash flow from operations by borrowing money at a lower cost than the property pays out. For example, if a property generating a 6 percent cash-on-cash return were to have debt placed on it at 4 percent, the investors would be paid 6 percent on the equity portion and approximately 2 percent on the money borrowed, thereby leveraging debt.
4. Hedge on inflation.
For each dollar that is created, there is a corresponding liability. Real estate investments have historically shown the highest correlation to inflation when compared to other asset classes, such as the S&P 500, 10-year Treasury notes and corporate bonds.
As countries around the world continue to print money to spur economic growth, it is important to recognize the benefits of owning income producing real estate as a hedge against inflation. Generally speaking, when inflation occurs, the price of real estate, particularly multi-tenant assets that have a high ratio of labor and replacement costs, will also rise.
5. Capitalize on the physical assets.
Income-producing real estate is one of the few investment classes that, as a hard asset, has meaningful value. The property’s land has value, as does the structure itself, and the income it produces has value to future investors. Income producing real estate investments do not have red and green days, as does the stock market.
6. Maximizing tax benefits.
The US Tax Code benefits real estate owners in a number of ways, including unlimited mortgage interest deductions and depreciation accelerations that can shield a portion of the positive cash flow generated and paid out to investors. At the time of sale, IRS allows investors a 1031 provision, allowing investors to exchange into a like-kind instrument and defer all taxable gains into the future. (See your tax adviser for full explanation.)
7. Asset value appreciation.
Over time, more and more inflation has made it into the economy, drastically reducing purchasing power. However, income producing real estate investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value as the net operating income of the property improves through rent increases and more effective management of the asset.
8. Feeling the pride of ownership.
The right property in the right location with the right tenants and ownership mindset can produce a tremendous pride of ownership factor that is highest among all asset classes. Home ownership is out of reach for most people. Imagine owning thousands of multi-family housing units instead?
No one can ensure the future of rental of income properties’ values, but this asset class seems positioned to continue to benefit from many other socio-economic issues that I will save for another time.
Mark J. Kohler is a CPA, Attorney, Radio Show host, author--and practitioner instructor for our Tax & Legal Strategies series of courses in our training program. Mark is a hands-on professional who helps students and clients build and protect wealth through wealth management strategies and business and tax remedies often overlooked in this challenging, ever-changing economic climate. His seminars have helped tens of thousands of individuals and small business owners navigate the maze of legal, regulatory and financial laws to greater success and wealth.
Mark’s invaluable advice can be found in his powerful first book, “Lawyers Are Liars: The Truth About Protecting Our Assets.” Mark’s much anticipated new book, “What Your CPA Isn’t Telling You – Life Changing Tax Strategies,” published by Entrepreneur, is a fictional story that brings tax planning alive. He also shares his knowledge and has created a loyal following of fans through his weekly radio show, which can be accessed here.
Mark is a proud father of four beautiful children and husband to his lovely wife, Jen. They reside in Orange County, California, where Mark practices his surfing skills and loves to exercise in the outdoors and play tennis. Mark will now teach you how to write-off things you may not have ever thought of. All this and more can be found in Mark's series of classes in our training program.
Technology and gadgets to help us succeed in business are an ever-increasing expense. Moreover, as small business owners utilize technology to do business nationwide, if not worldwide, these expenses (sometimes used personally), should be a deduction in their business. In fact, think about the following items and how you may use them in your business operations:
If you use any of these items to make money in your business, there’s a good chance they are a 100% deductible! Track all of these items, keep receipts and discuss them with your tax professional at the end of the year.
I always want to think of a business purposes for a technology item before I would ever purchase it. However, in the same breath I don’t want to throw good money at bad and buy something useless simply for the tax write-off.
“My wife would argue that my Phantom II Drone purchase was simply for personal use, but I assured her it was critical for footage from the sky of our office and enhanced our website with video and photos of our office building and company employees”
The Strategy for Your Cell Phone
In the Small Business Jobs Act of 2011, Congress removed the cell phone from the ‘listed property’ list. What this means is that you can write off 100% of your cell phone, correlated devices and service, as long as you meet certain criteria. Moreover, the IRS issued guidance with Notice 2011-72 clarifying the rules and Congress’s intent.
Essentially, this move by Congress and IRS was motivated by the fact that it was a constant fight in Court with taxpayers trying to prove what ‘percentage’ of their phone was business use versus personal use. In the end, the cell phone and service boiled down to a 100% deduction if you comply with the following criteria:
DON’T FORGET– If you have your family members legitimately working in the business and they need to use the cell phone for the operations of the business, as well as need to be accessible for business duties, there cell phone will be deductible as well!!
Is my Smart Watch Tax Deductible?
Under IRS Code, any expense that’s ordinary and necessary for that business is deductible, and would typically include related telecommunications equipment like a Bluetooth or headphones and mic for those important business calls. (IRC Section 162).
Many of a Smart Watch’s features (thing Apple Watch) are similar to a smartphone or Bluetooth device and can enhance your business sales and work productivity. Some of these features include calendar alerts for business appointments, business related texts, business calls, work email, social media for your business, Apple Pay for quick business purchases and immediate access to Apple’s business-friendly apps. Not to mention the added benefit of a built-in speaker and microphone that gives you hands-free ability to take that conference call while on the road (as well as look like Sean Connery from a 1970s James Bond movie).
Currently the IRS hasn’t taken a position on the new devices and with their current understaffed work load, it probably won’t be any time soon. Bottom line, at least some portion of your Apple Watch should be tax deductible, and it will depend on your business use of the functions.
NOW, to the CAR.
First and foremost, remember the auto deduction isn’t travel, but expenses for your car or truck. Also, remember this includes ALL your vehicles as long as they have some sort of business use, i.e. an RV, van, delivery truck or motorcycle used in your business (more articles to come)!
There are TWO MAIN OPTIONS to write off auto expenses: MILEAGE AND ACTUAL EXPENSES! You can learn about all this and more right here!
Mileage. On ANY of your vehicles you can use mileage as an EXCELLENT method to expense the business use of your vehicle. In 2016 your mileage deductions are as follows:
90 percent of our clients use mileage because it’s SIMPLE, EASY and a LARGE deduction, but keep in mind almost every situation with business owning taxpayers will vary and several MAJOR factors will impact the analysis. Consider the following:
If it is a NEW purchase, you may want to go with the Actual Method and get some bonus depreciation in the year you purchase, or maybe with a truck, van, SUV or RV you could even get more depreciation expense. However, most of our clients find the mileage deduction to be ultimately the best long-term decision when it comes to cars. It’s important you do your best to track your mileage.
Actual Expenses. The second method in deducting automobile expenses is by using the actual expenses for the vehicle. When you use this method you CANNOT use mileage. Essentially, you track your fuel, repairs, maintenance, insurance, tires and then also “depreciate” the vehicle or a portion of the lease payment if leasing.
The PROBLEM with actual is that depreciation expenses are drastically limited for cars, somewhat better in the year of purchase for a 6,000lb vehicle and then only really opens up for large trucks, vans and RVs in certain instances.
So this is where things get crazy. You have to consider issues such as the size of the vehicle, did you buy it this year (regardless of whether it was new or used), are you leasing, how much do you actually use it for business versus personal?… ALL OF THESE FACTORS play into your analysis as to what your deduction may be and if it is better than mileage.
Here are a few Special Circumstance Vehicles in this area of “actual expenses.”
SUV or Truck with Less than 6’ Bed. Both of these vehicles are treated the same. Yes, some of these trucks are more like an SUV when they have the two-row seating and a short bed. Thus, the IRS says they are treated the same for tax purposes.
Large Trucks and Vans. If the truck or van is over 6,000 pounds and the truck has a 6 foot bed or greater or is an enclosed delivery truck, then the $25,000 SUV limitation in the year of purchase for deprecation DOES NOT apply. In fact, you can deduct up to $500,000 in the year of purchase for the cost of the vehicle (limited to the business use percentage of the Truck or Van). Of course, there a number of other variables, but it is a common and often used deduction by small business owners. Moreover, any remaining basis unused with the 179 deduction, can then be depreciated in years to come in conjunction with the actual expenses of the vehicle.
Amazing Benefits of 179 Deduction. Bottom line, if you are in the business of buying a truck, Van, or RV, it’s critical you understand the 179 deduction and what it entails.
Leased Vehicles. Leasing is a phenomenal deduction, but not without its drawbacks. The tax benefits are phenomenal. You can again take all the actual expenses, including the lease payment (based on your business use percentage) and also save on the cost of a luxury car when monthly payments may be cheaper when leasing.
I suggest you create a spreadsheet to analyze the situation for your car. It doesn’t have to be complex either. Just think through your options AND realize that if you are going to spend THOUSANDS OF DOLLARS on this vehicle, it’s valuable to take a few minutes to analyze the various tax deduction options. Establish columns to compare mileage, to purchase, to lease, and then your rows can be different types of vehicles and different scenarios. You can do some initial research and calculations by simply pulling information off the web and then have your accountant/tax preparer fine tune your analysis!! It could save you A LOT of money to go through this analysis and process.
When it comes to these ever increasing expenses and strategies to make us more successful in our business, we should be looking for ways to deduct them. In fact, I argue that you should FIND reasons to use the technology you are already purchasing personal and convert them to a business use and asset in your business!! Make these items a deduction as you blow up your Social Media outlets and marketing plan. Don’t forget the little things my friends.
Mark Kohler teaches our Tax & Legal Strategies course as part of our Training Program, click here for more information. For more information on Mark, visit www.markjkohler.com.
There’s a reason so many dating websites exist. Not everyone is a good match, and the process of finding ‘the one,’ for many people, is just that… a process. At the same time, limitless factors and human intricacies come into play: personality, lifestyle, goals and preference just to name a few. Investing in real estate can be likened to the world of dating. Not every investor or aspiring investor is best suited for every deal. Real estate is a robust industry with investment options running the full gamut of size, complexity and risk. Understanding your personal real estate investing profile, and within that the types of real estate investments that best suit you as an individual, is a personal decision. One we believe not only worth exploring, but paramount to your success.
As an industry, real estate has been around since mankind planted roots, post our hunter gatherer days. Real estate as an area for investing and growing wealth has become increasingly popular over the last five decades. Since before the Pacific Railroad, the first transcontinental railroad in the US, people have laid claim and profited from the sale of raw land. Even today, people continue to buy land hopeful its value will appreciate. Typically in raw land deals investors rely on a long term buy and hold strategy. Others purchase land with the intention of making improvements to add value as their strategy. Take for example a little area of Central Florida Swampland that now houses the largest, most visited theme park in the world. External factors can increase land value as well, like when municipalities invest in redevelopment efforts turning previously dilapidated areas into hip entertainment districts. Just ask Tony Hsieh of Zappos who moved his company headquarters and his personal home to downtown Las Vegas just steps away from the famous Freemont Street Experience.
Single Family Homes, Rehabs & Vacation Rental Properties
In today’s day and age, single family homes are one of the most common real estate investments in the US. Even people who don’t consider themselves real estate investors take pride in their primary residence as an investment vehicle. Some attempt to monetize their home by dividing their primary residence into multi-family housing, like the Greeks in Astoria Queens or the Irish in Boston. Many are successful, but just as many run into trouble with inspectors based on zoning regulations or when trying to sell their single family home that has been subdivided to include four kitchens.
Other investors in the single family home sector typically use one of a few strategies. Some buy homes to use as rentals. As a long term strategy investors hope to generate cash flow while covering the mortgage and property carry costs, while in theory the home appreciates overtime. Investors looking for shorter term strategies in this sector tend to buy homes with the intention of making enough improvements to able to sell them for a profit without the long term carry costs. Most recently when we think of investors rehabbing properties we think of the short sale and foreclosure properties, but in the early 2000’s, some investors were able to turn profits by buying into new home developments, holding for a few months and then selling. Rehabbing, or property flipping as deemed by the reality TV shows that glorify real estate investing, continue to gain attention as federal and financing regulations come into play; a topic we’ll save for it’s own future discussion.
Another strategy in the single family home market is to buy a property in a major tourist market that can be used as a vacation rental. The explosion of web-base ecommerce has made this sector even more accessible and popular with sites like airbnb.com and VRBO.com offering investors self management tools. Investors interested in vacation rental properties need to pay close attention to local and state regulations. Hawaii continues to increase regulations for investors with rental properties. For example, absentee investors who aren’t full time Hawaiian residence pay an increased property tax rate and may be required to register for an annual business license with strict stipulations. One requirement currently in consideration in Hawaiian legislature is that investors be required to have an on island property contact. If you didn’t factor professional property management costs into your vacation rental overhead, that could have a serious impact on the profitability of your investment.
Multi-family homes as investment continue to be a hot and expanding sector in the US. We shared more on that topic in our last blog post here. Multi-family homes, like duplexes, triplex and quads, are typically viewed by banks, for financing purposes, the same as single family homes. This allows investors to realize economies of scale since one loan can secure multiple units. Investors are able to generate income by renting out all of the units, or occupying one as their home and renting out the rest. Fewer buyers are looking for multi-family homes than single family homes, so investors in this sector face less competition.
Within residential real estate, investors categorize apartment buildings into two groups: small and large. Since the definition isn’t set in stone, generally speaking, apartments with less than fifty units are categorized as small, and those with more than fifty units large. Apartments are categorized by their size due to the differences in associated financing parameters. Small apartments typically rely on commercial lending standards. Instead of being valued based on comps, like single and multi-family housing, small apartments are priced and sold based on their income. Meaning, how many units are rented and their current average rent. Investors interested in exploring small apartment buildings as an option need to evaluate the strength of the rental market in the building’s area; specifically, a markets vacancy and delinquency rates. Often small apartment buildings utilize onsite staff for management and maintenance who will work for significantly reduced labor costs in exchange for being able to live on site. Small apartment buildings are among the less competitive real estate investment options since the more difficult financing keeps many small investors away, but the small size keeps them below the interest threshold of professional real estate groups. Investors who are able to add value by increasing rent, or decreasing expenses and increasing management efficiencies can realize significant returns.
Large apartment complexes are the ones you see all over the country. Many rich with amenities like clubhouses, workout rooms and swimming pools. While the amenities attract renters and help the complexes command higher rent, they also bring higher expenses to manage, run and maintain. Large apartment buildings or complexes also have additional expenses for advertising and marketing to fill units. These properties typically cost millions, but can produce stable returns with minimal involvement. Many are owned by syndication, which are small groups of investors who pool their resources.
Moving beyond the residential and rental sector, some investors focus on the real estate wholesale market. Wholesaling is the premise of making money in real estate by finding good deals, entering into a contract to buy, but then selling the contract to another investor. Contracts in wholesaling typically need to be assignable. Meaning the initial buyer can actually sell the contract to another buyer without the owner’s permission. Real Estate wholesalers typically earn a flat fee per transaction and have a significant network of investors willing to buy their contracts. Sometimes even sight unseen. Hard work and complex dynamics with distressed time frames makes wholesaling difficult. However, successful wholesale investors are able to invest in real estate without a significant outlay of cash since they skirt closing on properties directly.
Alternate Real Estate Investments, REITs & Tax Liens
In looking beyond the traditional real estate investment sectors we’ve discussed, significant opportunities exist for investors interested in alternate options. Perhaps you’ve heard of some of these nontraditional real estate investments as investing in paper like REITs and tax liens.
REITs, short for Real Estate Investment Trusts, originated over sixty-five years ago. They were developed to give investors the benefit of investing in real estate with the ease of traded investments like stocks and mutual funds. Investors like the liquidity of being able to buy and sell REITs like stocks while getting the scale and transparency of publicly traded corporations. Through REITs investors can invest in large scale portfolios tied to all aspects of real estate like apartments, bonds backed by mortgages, commercial developments, hospitals, hotels, nursing homes, offices, shopping malls, student housing and more. REITs are categorized into two main types: equity REITs and Mortgage REITs. Equity REITs generate income from rent or the sale of properties they own. Mortgage REITs invest in mortgages or mortgage securities tied to commercial and/or residential properties. As an investment vehicle, REITs have proliferated both in the US and beyond with REIT offerings now in more than 30 countries. There are even REIT based mutual funds and ETFs (exchange traded funds).
Tax liens can be issued for all types of property – residential, commercial, raw land. When owners fail to pay their property tax, the government has the authority to place a lien against the property. The tax lien is issued for the amount owed plus any fees and penalties of course. Property with a tax lien cannot be sold or refinanced until the lien is paid. Investors can buy tax liens at auction. Tax lien holders then have two ways to make money on their investment. The first is a right to collect interest on the lien from the property holder at rates from five to thirty-six percent for up to a year. Alternately, if the owner fails to pay the monies owed to the lien holder, the investor as a right to claim their property. The laws differ by state, and property seizure will not happen without a lawsuit, that will get expensive and complicated quickly, but a determined tax lien holder will be given ownership. With such attractive returns, tax liens can be a lucrative investment, although not without risk. Individuals interested in investing in tax liens need do their homework. Investors need significant market knowledge as well as an understanding of the law and an ability to manage the complexities that can arise, like multiple tax lien holders for the same property.
How do you know what’s right for you?
Shotgun weddings don’t have a high long term success rate, neither does rushing into real estate investing without a solid understanding of the type(s) of real estate investing that suits you best. For example, not everyone is cut out to manage tenants.
Dealing with renters and property maintenance takes a certain type of hard work that doesn’t outweigh the returns for everyone. You have to take stock in what you like, what you’re good at and what style fits with your goals, both short and long term. Your availability to capital, risk tolerance and personality will all also come into play.
While we’ve hardly scratched the surface of the potential of real estate, our aim is to educate and inform you on real estate today, so that as an investor or prospective investor you are more empowered. Make sure to check out our comprehensive real estate investment training program where we will teach you all of this and more. As always, we look forward to your comments, questions and ideas. Thank you for reading!
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!