Every businessman, in one way or another, makes mistakes that can be serious, losing up to thousands and millions of dollars when we are talking about real estate.
This is because they are people who need to take risks, face debt, receive payments and tax incentives with which taxes can be reduced. The point is, being a real estate investor isn’t always as easy as it seems.
Therefore, this article explains what tax errors can be lethal in this business from the hand of Novarise Latino and the expert Henry Aldana.
Most common tax errors that cost you a lot of money
As mentioned above, every investor makes mistakes, at some point. In principle, because they don’t have the appropriate information. However, the most common is the lack of organization and the lack of a reliable communication system with financial management.
The most important fact is to have at hand a powerful tool that can inform you and provide the required information at a certain time.
The fact that you have, or not, an accounting system that is really informing you can help you avoid many errors. Why? Because you know the state of your business, what it has, what it lacks, the strengths, weaknesses and what your available options are.
In conclusion, the first fault is the lack of organization. Without that there is nothing.
How to correct this error? First, you must educate yourself. It goes beyond having experts advising you, but rather for you to be aware of the matter, because you would be putting limits on the knowledge process.
It is not just about advice, payroll and taxes. The idea is that they merge the ideas to polish the project and work together to define an ideal strategy. In addition to another tool that helps you reduce taxes ethically and morally.
The key is there: Reduce taxes in order to get the most out of it. The goal will always be to keep more legal money in your pocket.
What can you deduct from your business to pay taxes?
Everything that is directly related to your business is deductible. Everything related to tools, software, capital and resources is deductible.
However, there are things that are, indirectly, expenses that you can use in your taxes, in your return and that will help you save thousands and thousands of dollars in taxes.
The U.S. tax code and real estate
The US financial system creates an environment in which investment is promoted.
Henry Aldana explained that the United States was based on the principle of free enterprise. In other words, it is based on creating effervescence, business, a new world in which that economic competition develops.
According to Aldana, 95% of this great monster – referring to the US tax code – is about 11 or 12 Bibles. Most, he explained, is to reduce taxes, to put those incentives to business owners.
For investors to create and invest in the United States, the government pays, incentivizes and encourages with tax incentives or deductions. That happens, for example, with depreciations. He explained that these are a phantom expense. Depreciation puts the money back in your pocket, compared to a purchase or investment you made previously.
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“(…) It is an expense that is not cash that is coming out. On the contrary, it is an asset that is appreciating, but at the same time you are depreciating it for taxes, “he said.
Another deduction that people don’t recognize is working from home. Therefore, companies can pay your rent for the use of your house and it is not a payment. You can do both.
First, you can make a rental agreement. If you do, you have to include what the company pays you as income in taxes. Now, if you do what is called an accountable plan, the company can reimburse the use of the house. Therefore, refunds are not taxable.
Another thing, you can pay your minor children, approximately 8 to 17 years old. This would be a kind of salary. Since they are minors, they do not have to deal with taxes. They do not even have to pay their security medicare.
If you pay your minor child $ 12,000, you would be saving approximately $3,420 to $ 5,000. The figure varies depending on your tax rate and tax rate.
On the other hand, you must take into account the use of the vehicle for work. It may be in your name but you use it for business constantly. So instead of you giving that to the company, the company could reimburse you for your travel and maintenance.
This is what the tax plan is for: To plan for the long term – as in the case of children with more than $ 10,000 and their university funds – and also have advantages to reduce taxes. In the case of children, the law says that you have to write them a check that must be deposited into their personal accounts; but it does not say how they have to use that money.
Children cannot write a check for themselves. That is not to say that they cannot do something for the business. They can come to help you dispose of the trash, they can help with cleaning, they can help you enter basic information, answer the phone, design things.
Kids today are super creative with tools and their mindset can add up to a lot. Imagine that you have three children and you are paying him $ 36,000.
That is, it is $ 12,000 that you are saving in taxes. The law says: “You have to write them a check, they have to deposit it.” Now, the law does not say what parents can do with that money that you paid for yourself.
The important thing about this is finding a way to lower taxes and save money to reinvest. Important clarification: Children can write checks, but not sign them. The signature of a minor is invalid.
The 1031 exchange
The 1031 exachange refers to the fact that you can have investment real estate and want to sell it. With the proceeds from that property, you use 1031 to avoid paying taxes. In other words, the goal of 1031 is for you to reinvest those earnings in another property that is equal to or of greater value.
With the 1031 exchange you can save money on taxes and reinvest money in real estate wisely. An example, if you have a property that you bought for $100,000 and now its value is $ 150,000 and you sell it without using the 1031, without having the agent, without doing the whole process, you are going to have to pay taxes of $ 50,000 as capital gain, such as capital gain.
On the other hand, if you use the 1031 and hire the right agent to park that money, the amount stays in the account of this person, eliminating the concept of 1031. Therefore, it is important that, before selling a property, hire this individual to help you in the process, because when you sell the property you have 90 days to find a new site and then 90 more days to close.
In other words, you sell the property, buy a new one and in those six months you must reinsert the $ 50.00 in a new space. That’s what the agent is for.
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In the case of multiple properties, everything that has to do with the agent, how it does the transaction, etc., there must be an allocation in each property of the 1031.
This not only works for the real estate field, but also for any market. Returning to the issue of inflation, if you bought a house for $100,000 and at the time of selling it it costs $150,000, in a time of high inflation (10%), What happens to the taxes that must be paid at that time? Are those of that appreciation of $ 50,000 paid?
On the other side of the coin, the value of money, if you invest it correctly and have a compound interest in your favor, that’s good. But generally, devaluation is always working against you.
A compound interest is the accumulation of interest. Instead of having simple interest that accrues once, it accrues every year. The percentage you accumulate is based on the last amount.
To say, a simple interest is 1% over $100, but if you are going to accumulate it, now it is 100 plus 1% and the following year it is 101% more and it practically goes away, creating the effect of the snowball. As more is rolling, more time goes by, it gets bigger and bigger is the investment.
That’s the kind of investment that tends to be, in quotes, against inflation. Now, if an international investor invests 100% on their own, versus when they invest with partners in the United States who are residents or are already citizens, what would the difference be?
There are several models in this case. Whoever wants to invest in the United States and creates a company. Thus all deductions, benefits and incentives are available to that person, assuming that they have created an entity to park their investments permanently. In the end, foreigners pay the highest tax in the United States.
Aldana pointed out that the real estate model unfortunately has to pay the tax, not just the state but the capital gain, assuming it had to sell the property. In addition, you would have to pay the 39% federal tax withholding..
The possibilities of a virtual business
The coronavirus pandemic intensifies the risk investors have to face. This has affected everything we know about. Even the world of taxes and the United States tax code.
Since 2018, with former President Donald Trump, the country has become a tax haven for the rest of the world, wanting to attract investors. One of the things that were created -especially for these people- has to do with virtual businesses that, without a doubt, move billions of dollars.
This is done with the support of an LLC, treated as a single member, monotax or natural person. It’s called a disregarded entity, a single owner. If you make a partnership, you break the whole protocol and have to pay taxes again.
The moment you create an LLC and choose to be assessed as a monotax, you can open accounts, have a federal number, have a local business and operate it from the United States.
“Actually, it’s just a bypass. You’re doing everything here, selling your product, especially those people who are selling products online. Those people who are doing consulting from other countries, other people who are freelancing from other countries, other people who are selling products through Amazon or all these virtual stores, qualify for this. You have to report taxes at the end, but you have to file a return on March 15 of every year, but you don’t pay taxes. They are totally exempt, they are exonerated, they are forgiven ”.
Important: You can do business in the United States with this process, as long as you do not have physical offices or employees in the country. It must be 100% virtual to qualify for this exemption.
Make sure you don’t make this series of blunders when incorporating your business or real estate investment within the United States to ensure maximum profit with the lowest possible tax payment.
The United States is fertile ground for investing, especially in real estate
Aldana said there are many strategies to make a successful investment in this country and develop incredibly good projects with the help of credits and incentives. This is the case of 1065 or 1040-NR, which are for non-residents.
“An example, creating other structures. Structures are owned and sophisticated structures are created, with LLPs, with corporations, with LLCs, with partnerships. They are created to make a bubble, a protection for them so that they pay less taxes; but in general, they are simply going to be subject to paying more taxes. Especially in real estate, ” he said.
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