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California State Corporation: Real Estate Research Center • California State Real Estate • California State Investment Co., Ltd. Co branded Enterprise
Email 96 • Palos Verdes, CA90274 • Phone 310-245-6952 • Email [email protected]
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Smart real estate tax plan
Palos Verdes. CA: Here are three simple tax cuts. The income tax is calculated by multiplying the taxable income by the applicable tax rate. The lower the taxable income, the lower the tax rate and the lower the tax revenue. This document explains how to do this.
How to reduce taxable income
The simple basic concept of reducing taxable income is as follows:
► Income distribution over time
► Distribute income to entities.
► Group income and expenditure
Understanding each concept will lead to substantial tax savings.
Distribute income according to time
Real estate uses the installment sales reporting method to provide opportunities to spread income over several years. Accept a relatively low initial payment and share the principal within a few years, thereby reducing the total taxable income in any year.
In this chain method, the income can also be shared by time. The structure of both methods can provide you with maximum reporting flexibility.
If you are a real estate owner who purchases real estate and want to share the tax on the commission, as long as circumstances permit, the commission will be determined according to the events occurred to avoid constructive income. For example, commissions may depend on the property maintaining a certain level of cash flow and/or profit.
Income distribution between entities
If income is allocated to a single entity, the income of all entities that need to be reported will decrease. The effective transfer of income can also be achieved by transferring the ownership of assets to companies, cooperative enterprises, relatives or trusts.
Relatives of low-income groups can enjoy the remuneration for services provided. As long as these services represent legitimate business transactions, distributing revenues in this way can save thousands of dollars in taxes.
In the case of different tax reporting years and bases(cash or accrual basis), operating entities can share income and expenditure on an annual basis in order to apply the tax law.
Revenue and expenditure groups
The grouping of income and expenditure can reduce taxable income. Real estate provides flexibility to implement this tax planning strategy. More specifically, Leased real estate fully meets the definition of the active participation rule($25000 can be deducted from wages and other active income), so it is. For many individual investors, the write off itself means a lot of tax savings.
When changes in income or expenditure can be predicted, the benefits of grouping are amazing. For example, refinancing will generate higher interest expense deductions to offset the expected growth in rental income. High point short-term loan contracts can also see the same effect.
If expenses are expected to increase, increase the revenue of the installment contract to offset. Avoid reporting revenue through renegotiation when the bill matures. If the senior secured loan matures before your bill matures, put it under new financing to avoid payment.
Capital gains and losses can also be grouped to maximize tax gains. If limited, capital losses can be used to offset additional general income from capital gains.
Increase depreciation deductions.
Minimize depreciation:
► The depreciation base of assets must be increased and senior staff must be employed.
Assessment by tax role or independent valuer.
► To shorten the depreciation time of assets, please identify personal property assets, which can depreciate in a shorter life.
Convert real estate into personal property.
The IRS defines tangible personal property as all personal property except land and its improvements. For example, buildings or other inherently permanent structures(including structural components of such buildings or structures)(Regulation 1.48-1 [c]); this is the most relevant test to determine whether an asset is part of a structure rather than personal property. We use the following six tests to support this:
► Can this building be moved? Has it actually moved?
► Can the design or construction of this building remain unchanged forever?
► Whether the forecast or prediction can be displayed
Additional length?
► How important it is to move, and how
Does it take a lot of time?
► How much will the property suffer after moving?
► How does the property stick to the ground?
Last tax loophole
Leased real estate ownership still offers the opportunity to be an active participant. In this way, qualified owners can deduct $25000 from their salaries and other non current income each year. You’ll notice what I said. “; qualified owners” can be cancelled only if they meet the following five basic conditions:
► The person who wants to cancel must be an individual taxpayer.
The Company and Limited Partners are ineligible. According to the Internal Revenue Service, married couples can declare as one person, and husband and wife can cancel together. The lessee in the form of joint ownership meets this requirement.
► The real estate must be a real estate leasing activity. In other words, its main purpose must be to lease real estate to qualify.
► Individuals must always own at least 10% of the leased property. The husband and wife can jointly own 10% of the shares, but the IRS considers them as individuals, so they are still eligible. Individuals can hold more than 10% of shares, but not less than 10%.
► If the adjusted gross income(AGI) exceeds $1000, the maximum write off of $25 million will gradually disappear. The minimum write off amount jointly declared by marriage taxpayers is $1000, plus $2 for every $1 increase in AGI. If AGI reaches USD 150000, this exemption cannot be obtained.
► Individuals should be considered as active participants. Participation requires individuals to participate(in an important and real way) in making management decisions or arranging for others to provide services. Examples of management decisions include rent rate and term setting, capital and repair expenditure approvals. As long as the owner makes significant decisions, the management company can handle daily operations.
