Investor · Parker, CO · Member since 2016 · 550 posts · 389 votes
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.
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.
Investor · Gilbert, AZ · Member since 2015 · 96 posts · 46 votes
10y
Stuart,
I am glad you started this thread as I have been thinking about this myself. I am trying to transition from having a lot of rentals into a portfolio of performing notes and working on some non performing. As I get rid of rentals , I lose tax write offs.
My thinking is that working a note business can be classified as an active business instead of a passive activity like having rentals. Then it becomes a schedule C activity and you can have a Solo 401k and all business expenses associated with the business. This might include travel expenses to inspect collateral, maybe vehicle expenses if you have some local notes, office expenses like internet, home office etc. I am no CPA but I have been pondering how best to structure for max tax benefits.
Investor · Kingston, WA · Member since 2008 · 1k+ posts · 1k+ votes
10y
In a non IRA environment, no tax savings on notes, but if you have rentals in your portfolio, those can help offset your note income profits. @Scott Mclaren's idea on a SoloK may be a viable approach
Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
10y
@Stuart Grazier
If you are looking to reduce your taxable earned income, then consider opening a solo 401k if you are self-employed with no employees, as the solo 401k contribution rules allow for high contributions. For example, $53,000 can be contributed to a solo 401k in tax year 2016 plus an additional $6,00 for those age 50 or older. See the following IRS link for more information.
Lender · Austin, TX · Member since 2012 · 211 posts · 166 votes
10y
I have looked at this myself. So far the best answer is to combine rental homes with notes. Notes produce the cash flow, while rental homes produce depreciation and other deductions, even if they are break even.
The beauty of this is the fact that, while you enjoy tax savings for a couple decades, in the end you will own an asset outright (the home) in addition to pocketing the rent check. Keep in mind rent keeps pace with inflation, and as such a $1500 rental payment now may be a $4000 rental payment 15 or 20 years from now.
With regards to note interest income, this is the best blend for tax savings I have seen so far.
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.
That would be correct; however, depending upon how many notes you are investing in you might want to consider using a business entity to pay a salary and reduce it with other benefits and income types.
while you certainly can invest in notes in your retirement account and all of the income produced by those notes will be sheltered from taxes - this would not address your tax challenge now. You will not be able to transfer your existing notes that you personally own into an IRA or 401k.
If after consulting with your CPA you determine that there is a way to structure a business that produces earned income - you could shelter some of that income into Solo 401k, so it should help your bottom line.
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.
Consulting · Fort Worth, TX · Member since 2014 · 65 posts · 15 votes
6y
@Dave Van Horn Apologies for bumping such and old post but could you talk more about or provide any resources about utilizing captive insurance to offset the taxes?