Taxes

Taxes can be, and are part of your real estate syndicate profit strategies. Having said that I leave the intricacy of the federal and state rules tax up to you and your CPA. Your syndicate will more then likely be a LLP and that allows the pass through of profits and losses to investors. Passive loss rules and alternate minimum taxes rules will limit what your investors can write off against their personal earned income.

The unique tax advantages that come from real estate investing can reduce, post pone and minimize taxes for your investors and you. The primary means of accomplishing this tax magic is with deprecation, long term capital gains, and postponement.

I do not use tax savings when determining if a particular property is profitable. I like to promote the syndicate on it's profit making potential and let the tax advantages be a bonus.

Depreciation:

The IRS allows you to depreciate the buildings and other improvements over time. This paper deduction reduces the taxable income to your investors. They get the money from the profits and do not have to pay the taxes until the property is sold. The IRS sets the number of years you can use for deprecation (see IRS.gov publication 946 ). Keep in mind that the depreciation is a recaptured item and taxable at capital gains rates when the property is sold. The exception to this recapture rule is if the property is not sold, but inherited by your heirs, the new cost bases is the current appraised value.

If you trade a property rather then sell it or do 1031 exchange the capital gain taxes can be postponed indefinitely.

At first glance depreciation does not seem very flexible. With a little thinking and research there are opportunities. One strategy is to use component depreciation. This is where you make a substantial improvement like new refrigerators for all the apartments you own, or another major improvement. You depreciate that expenditure over a shorter useful life. Examples of improvements that will not last 37.5 years and thus could possibly use faster depreciation might be wood privacy fences, over head doors for a self storage facility, carpet, A/C units etc. Have the supplier of the product send you a letter which states the useful life of their product. That letter is your documentation for the IRS if your deduction is questioned.

Another method is, one group owns the land and leases the buildings, which are then 100% depreciable.

Long term capital gains:

The gain on the value of the property over time or from improvements you made is taxed at time of sale at capital gains tax rates. At the time of this writing that was at a 15% rate. Any depreciation taken will be recaptured at that time and charged at the capital gains rate.

Doing a tax free exchange or trade could in theory at least post pone the tax forever. This can be a strong motivational point for high tax bracketed investors.

Postponement of taxes:

Your real estate syndicate is a business and will pay many forms of taxes. Postponing taxes keeps that money available for further investing. Through the use of deprecation, shifting expenses from one year to another, trading property rather the selling outright, and other tax adjustments you are postponing the payment of taxes until a later date and hopefully at a lower rate.

The IRS wants you to pay all the taxes that you have to. The tax rules are set up to encourage you to invest for the long term good of the country. Private investments creates jobs and stimulates the economy and thus increases the over all taxes paid into the government at all levels. You are encouraged and should use all the tax rules to reduce or eliminate the payment of taxes on your income and your investors income.

Think outside the box:

An office building owner wanted to add to his building. The city building department wanted additional parking to accommodate the added square foot of office space before they would grant a permit. The building owner leased the land needed for the parking lot from a neighboring land owner for 100 years rather then buy it. The land could not be depreciated but the lease payments are a business expense deductible against the properties income in the year paid.

A mini storage operator replaced all his facilities overhead doors at a cost $150,000 he got a letter from the door company showing that the useful life was ten years. He depreciated the doors over ten years instead of the much longer IRS chart rate.