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Updated over 6 years ago on . Most recent reply

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Robert Steele
  • Investor
  • Lucas, TX
351
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618
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How do you tax shelter your cash flow?

Robert Steele
  • Investor
  • Lucas, TX
Posted

In the beginning it wasn't too hard. The property depreciation would usually shelter all the income from my rental properties. Now that these buggers are getting paid off the income is increasing and the depreciation doesn't cut it.

With my existing 6 figure salary all this rental income is just cream on the top for Uncle Sam to skim off. When I retire and my salary disappears it will be a very different story and not hurt so bad - but in the meantime ...

I've been thinking of some way that I can shelter this income. Note that my rental income counts as active income not passive so there are some more options open to me.

Some thoughts:

The first two are passive income shelters.

a) Buy an expensive rental in an awesome neighborhood with break even cash flow on it. Use the depreciation write off to shelter other income. Risky and speculative. If I could get in for 5% down (does anyone even offer those loans anymore) that would mitigate the risk somewhat.

b) Buy limited partnership shares in oil & gas exploration/drilling. They have some sort of mechanism like depreciation called IDC which can mean writing off 85-100% of your investment in the first year. E.g. Invest $40K and you get a $40K tax shelter.

The rest are active income shelters.

c) Max out every pre-tax investment option available to small businesses. Open my own 401(k) and HSA.

d) Make capital investments in my existing properties and use the 50% bonus accelerated depreciation (assuming that is still available this year).

e) Spend all the business income before it can be taxed. Remember that businesses pay tax after expenses - mere W-2 mortals pay taxes before expenses. This would probably mean setting up a C-Corp or something which would then suffer from double taxation.

f) Buy a Hummer H2 for the business and write off the entire cost as a capital expense.

I'm not sure I like any of these ideas but thought I would throw them out there anyway. What ideas do you have?

Most Popular Reply

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Dmitriy Fomichenko
#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
6,265
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17,872
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Dmitriy Fomichenko
#1 New Member Introductions Contributor
  • Solo 401k Expert
  • Anaheim Hills, CA
Replied

@Robert Steele

consider self directed Solo 401k, this is a great tax sheltering vehicle. You can defer up to $50K per year from taxes and then use those funds for investing. All the gains/income/profits from investments owned by your Solo 401k would be sheltered from taxes.

  • Dmitriy Fomichenko
  • (949) 228-9393
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