Tax Strategies for Mortgage Note Investing

[Stuart Grazier]

For all the note professionals out there:

I have accrued a decent portfolio of performing mortgage notes over the last couple of years and my tax bill at the end of the year has gotten quite large. As far as tax deductions, my CPA says there isn't much I can do to reduce the tax bill, as there aren't many things I can write off, and it's not like a physical property where I can depreciate the home. Or can I?

I know that quite a few people buy mortgage notes within a self-directed IRA to save on the taxes, but all of mine are currently owned in an LLC.

Besides opening up an IRA, I'm wondering if there are any other tax strategies / deductions that can help me reduce my tax bill next year....legal of course.

Thanks.

[Dave Van Horn]

@Stuart Grazier

There are some great strategies mentioned above.

One I didn't see was, have you ever considered having a partner (i.e. a parent, child, or heir) in the LLC who is in a lower tax bracket and make them into a majority owner? In that scenario, you would still be a partial owner and manage the entity but the members in the entity could be taxed at a much more favorable rate.

Depending on what your estate planning and investment goals are with your portfolio, another strategy where you could also achieve tax saving advantages would be by utilizing certain type(s) of trusts (like an irrevocable trust, for example).

And if you plan to have a larger note operation, it might make sense to form your investment company off-shore. Tax-wise, it’s similar to the solo 401K strategy, but you can generate tax-free income off-shore (say in the Cayman Islands for example) and you are only taxed if and when you bring it on-shore. When you do bring it on-shore, you might be able to offset or partially offset these taxes by utilizing captive insurance.

So just a few more ideas to consider.

Best,

Dave