Reduce Taxes Through Rental Property?

Question

Hello,

I have a family member who makes a significant amount of money a year and he hates paying taxes. He just got a very large check in which 50% is likely going to go to taxes. Would it make sense for him to start a real estate holding company to reduce taxable income? How does the tax side of property management work? Please advise if there are any strategies out there to move some tax free money into real estate investing...

Thanks,

Jeremy

Chris Soignier · Answer

If you have a medical issue, are you going to ask for advice on the internet?   No, you're going to see a doctor.

Same thing w/ this issue: there's a lot of money/taxes at stake, so hire a professional who can advise per the particulars of the situation and desired outcome.    He's getting a very large check, so it's worth spending a small % of it for competent tax advice.

I give and seek a lot of advice here on BP, but when it comes to legal and taxes, I happily pay for professional guidance that's tailored to my situation.

Brandon Hall · Answer

Thanks for tagging me @Matt Motil and @Russell Brazil.

@Jeremy Miller this is a common issue with high net earners and high net worth individuals. Depending on how he earns his income will greatly affect what strategies are available to him. Considering there are eight days left in the year (less considering the holidays) there isn't much that can be done in terms of developing and implementing new strategies.

Starting a new business venture is not a tax deductible expense. True, some of the expenses may be deductible, but only once the business is actually operating (given the eight day constraint, unlikely that he can get a business operating prior to the end of the year).

The best options at this point, if he's a W2 earner, are to max out retirement accounts and an HSA.

If he currently operates a side business, there is a lot more flexibility.

Russell Brazil · Answer

I 2nd talking to @Brandon Hall.

If your friend has a significant income though, it likely would not help him. Real estate losses can only be used to offset your income if you make $100k or less, and a partial offset from $100k-$125k, and then after that it is eliminated altogether, unless you qualify as a real estate professional. (I think)

Even so, the goal with investing is to make money...so hopefully over the long run your real estate investments are making money, thus creating a situation where you have to pay more taxes.

Michael Henry · Answer

Please advise a tax professional;

If your relative becomes a real estate professional he or she will have the greatest tax  benefit. Otherwise he or she tax benefits will be limited to passive losses.

And in terms of tax free money I believe you would be looking at a self-directed IRA which is a investment tool for retirement.

Stone Teran · Answer

Yes.  I'm a CPA so people talk to me about taxes even though I'm not in the business of providing tax advice.  IMO a high tax bill is just confirmation that you are raking it in.  Sure, there are strategies to delay or slightly minimize tax, but tax law was written to pay more as you make more.

Matt Motil · Answer

I would say that starting any kind of business would offset taxes, but I'd recommend talking with @Brandon Hall, he's got my back when it comes to taxes.

Jeremy Miller · Answer

He is his own S-Corp and gets paid sales commissions.

Matt Motil · Answer

He's self employed but doesn't work through a protected entity like an LLC or Corp already? If not, then you might be able to form an LLC, file S designation for taxes and retroactively go back to 1/1/15 and claim everything for the year under the entity. If that were the case you've got some options, but like @Brandon Hall said, you're kind of waiting to the 11th hour to get started.

Brandon Hall · Answer

@Jeremy Miller care to elaborate on "technically self-employed?" There may be plenty of options here.

Transferring money to a different account will not qualify as a tax deduction, even if you view it as an investment into a new business venture. It's the same as investing in real estate (the purchase is not deductible) and investing in the market (again, purchase not deductible).

Jeremy Miller · Answer

Brandon - thanks for the info.

He is technically self-employed. I was hoping that by starting some type of holding company. He could put, say 100k or 200k, into the business (holding company or LLC) tax free and use that money to buy investment properties down the road.

If nothing like that exists (does sound too good to be true), we'll just have to look at something for next year.

Reduce Taxes Through Rental Property?

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