Tax Exemption for 1 year - Good or bad idea?

[Mikell Elliott]

I currently work a full time job and plan to begin investing in real estate this year. A real estate investor from a certain real estate investment group (which charges $20,000 for a mentor lol) told me to go exempt from taxes and get an LLC ASAP so I could have access to all the money I need.

I went exempt at the beginning of the year. Will I have to pay all of the taxes back next year or are there ways around this once I purchase my first investment property this year? 

[Brian Schmelzlen]

What do you mean you went exempt?

If you mean you set up a not-for-profit entity, those aren't even fully tax-exempt as "unrelated business income" is subject to taxes.

[Mikell Elliott]

Hey Brian,

When I say I went “Exempt” I mean I’m having a lot less taxes taken out of my check. For instance, before they would take $500+ from every check in taxes but after going exempt, they only take out around $200. That’s an extra $300 per check I wasn’t getting before because it went towards taxes.

[Paul Allen]

Assuming you get paid 24 times per year:

If your tax bill for the year is $4,800, then you're fine. The $200 you're having withheld covers it.

If your tax bill for the year is $10,000, then you're going to owe $5,200 plus a penalty for under withholding.

[JD Martin]

That's not exempt, that's just reducing your withholding by boosting your deduction claim. Buying something and using that to reduce your taxable income can work if you do enough repairs on the property or have a high enough depreciation write-off without taking in any rental income. But if you start renting it out right away, without any repairs to deduct to wipe out the rent, you could end up owing *more* taxes and facing under-withholding penalties. 

If it were me, I would leave things as is, buy the property, and see where you end up. If the extra $300 per month is material, you're probably unprepared for investment property anyway. 

[Mikell Elliott]

Ah, thanks Paul! This was very helpful. I believe my tax bill is more likely to be $10,000 considering how much they took out last year and in that case it would be best not to go exempt.

Originally posted by @Paul Allen:

Assuming you get paid 24 times per year:

If your tax bill for the year is $4,800, then you're fine. The $200 you're having withheld covers it.

If your tax bill for the year is $10,000, then you're going to owe $5,200 plus a penalty for under withholding.

[Mikell Elliott]

Makes perfect sense! If I continued doing this it would be a huge risk because I don't plan to repair much and would like to start it off as a rental property. I will be sure to start paying the extra $300 again to prevent issues during this time next year. This was great advice! Thanks again!

Originally posted by @JD Martin:

That's not exempt, that's just reducing your withholding by boosting your deduction claim. Buying something and using that to reduce your taxable income can work if you do enough repairs on the property or have a high enough depreciation write-off without taking in any rental income. But if you start renting it out right away, without any repairs to deduct to wipe out the rent, you could end up owing *more* taxes and facing under-withholding penalties. 

If it were me, I would leave things as is, buy the property, and see where you end up. If the extra $300 per month is material, you're probably unprepared for investment property anyway. 

[Caleb Heimsoth]

Mikell Elliott this strategy sounds like simply telling the IRS “I’m now tax exempt” and the IRS will simply tell you no.

Also for future references a LLC does very little if anything for tax purposes (assuming it’s a single member LLC).

No tax advice given

[Mikell Elliott]

That's a good way to look at it haha wow that's good!

Originally posted by @Caleb Heimsoth:

Mikell Elliott this strategy sounds like simply telling the IRS “I’m now tax exempt” and the IRS will simply tell you no.

Also for future references a LLC does very little if anything for tax purposes (assuming it's a single member LLC).

No tax advice given