Income Tax Savings

Are you interested in how to save income tax by investing in real estate?  Well, reach into your pocket, take out two $1 bills and set them on the table in front of you.  Look closely.  Except for the serial number they’re both the same, right?

Wrong!

All dollars are not the same.  As a matter of fact, some dollars – such as those earned from owning rental property – are twice as good as other dollars!  Let me prove it to you.

Let’s assume the first dollar came from your job, and the second dollar came as cash flow from a rental house you own.  Take a closer look at the first dollar…the one from your job.  Think of all the effort that went into earning that baby: commuting, meetings, deadlines, your boss, customers, office politics, etc.

OK, now for a little magic.  Wave your hand over both of the dollars and chant these secret words:

    “Meetings, bosses, customers and faxes . . . That’s ok, but what about taxes?” 

Dollar number one begins to shrink before your very eyes:  almost half of it goes to pay taxes (federal income tax, state income tax, plus Social Security, Medicare or self-employment tax).  You’re now looking at a 50-cent dollar!

All that work and you’re left with a measly 50-cent dollar!  That’s right, 50 cents.  The worst possible dollar you can earn is a dollar from your job.  The reason:  about half of it goes to pay taxes.  It’s no wonder most Americans retire with little or no wealth.  They spend all their working days toiling for 50-cent dollars. 

Now look at dollar number two, the cash flow from your rental property.  This dollar has not shrunk — it’s still a whole dollar.  Why?  Because a dollar of cash flow earned from your rental property can be tax sheltered, thanks to depreciation.  The depreciation (also known as cost recovery) can provide income tax shelter from federal income tax and state income tax.  In addition, there’s no Social Security, Medicare or self-employment tax on these dollars.

But, don’t lose your head.  It’s true there’s no tax due on that dollar — at this time.  However, there might be tax due in the future.  This is because the tax savings (income tax shelter) created by depreciation is great while you own the property, but it’s not a one-way street.  When you sell your rental property, your taxable gain is made up of appreciation and depreciation.  The depreciation portion of your gain is "recaptured" (taxed) by the IRS at the time of sale.   But there are several ways to reduce or eliminate this tax, depending on how you dispose of the property.  Possible options include exchanging, bifurcating, gifting or dying (not your number #1 choice)!  If you’d like more in-depth information on income tax savings, including reducing or eliminating recapture, as well as other tax saving tips, my Audio Seminars will help you.

But there’s a bright side to recapture.  Even if your depreciation is recaptured and you end up paying back the tax savings someday, you will have had the use of all those dollars the entire time you owned the property.  Think of it as an interest-free loan from the government.  Not bad.  Most people lend their money to the government interest free (that’s what you’re doing if you get a big refund every year at tax time).  Isn’t it better to receive an interest-free loan? 

Let’s learn more details about depreciation and how to save income tax with rental property.

(If you’ve already seen Tom’s introduction and want to jump straight to the "Tax Savings” topic please fast forward to 2 minutes, 50 seconds.)       

                                                           "PART 1"

My Audio Seminars  go into much greater detail.  They include Worksheets, Case Studies with Answer Sheets.

 

  

 

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This material is designed to provide information about the subject matter covered.  The accuracy of the information is not guaranteed.  This material is sold or offered with the understanding that neither the author nor the publisher is not engaged in rendering legal, accounting or other professional services.  If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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