Major Tax Deductions

[Vikram C.]

I'd like this thread to be a place where we compile a list of the major tax deductions available to a real estate investor. Since I do flips, I do not get the benefit of depreciation, but here are a couple of good ones still available to me:

1. Defined benefit contributions. Looks like I can put $195,000 each year into this tax free. But can I self-direct this amount so that it is well-invested after I make my contribution?

2. Foreign earned income. Depending on the number of days spent abroad vs the U.S., I may be able to deduct up to $91,400 this year. This money can be invested any way I like, including in flips.

These two add up to about $280K in tax deductions. Any other good-sized deductions that you guys know about?

[Don Konipol]

I have set up and been contributing to a defined benefit plan for the last 8 years. Here are some important points about these plans:

1- they can be used by a sole practitioner or one man business.

2- the amount the can be contributed to the plan in any one year is determined by the assumed income and profit on the plans capital, the age of the beneficiary, the retirement age of the beneficiary, the amount of assets in the plan, the number of years left to retirement, and the life expectancy tables published each year.

3- $195,000 is currently the maximum yearly benefit; however the max that can be contributed is determined by #2 above (can be more or less), the maximum deductible is currently $367,000 per year!

4- These plans are only good if you can fairly accurately predict that your earnings will continue for a minimum of 8 years or so because even if you earn no money you will be required to fund the plan. If you do not fund the plan the plan will self terminate, and you will owe all taxes that would have been paid plus an early withdrawl penalty of 15%!

5- To set up these plans you will need both a licensed actuary and an attorney specializing in defined benefit plans. the cost will be prox $3-4 K to set up, and prox $2K per year in fees to pay for the acturial work (which has to be recalculated every year) and the legal compliance issues (to ensure that the plan is in compliance with the ever changing government regulations).

6- you can be trustee for your plan as well as custodian, making all the investment decisions. There are rules in place about the plan providing a direct benefit to yourself thru the plans investments, but in most cases the investments would be passive (my plan invests in real estate notes and real estate limited partnership interests).

7- Under current law, the plan withdrawls are taxable as ordinary income. Hence the benefit of the plan is having the tax portion of your earnings working for you until withdrawl, and paying taxes in the future (in depreciated dollars).

Hope this is helpful.