Tax Considerations In Your Purposeful Plan

There are two basic approaches to real estate investing. Investing for current income or investing for future income. Both approaches are useful depending on where you want to go and where you are in your plan. This is where you might hear the BawldGuy talking about Purposeful Planning.

There are a number of ways real estate can create current income. The best examples would be through wholesaling and flipping. In this post, I want to look at rental property which can be selected to emphasize income or capital growth.

Rental property has four ways to create wealth or income.

• Cash flow
• Appreciation
• Equity buildup
• Tax savings

An investor can attempt to maximize one or more of these aspects of real estate. For those wanting to create the most current income would emphasize cash flow. An investor looking for capital growth might emphasize appreciation and/or equity buildup when selecting a property.
Regardless of your investment strategy, tax planning is an important consideration that needs to be planned for as well. Your Purposeful Plan should take advantage of tax strategies that minimize taxes during the investment period.

There are many choices you, as an a real estate investor make during the year that can have varying effects on your tax situation.

• How active you want to be in managing properties
• Financing decisions and choices
• Timing of income and expenses
• How security deposits are handled
• Use of a home office or storage area
• How property is sold
• Hiring contractors or employees
• How personal property will be depreciated
• How to take title to a property
• How to handle easements and encroachments
• When or if to do a 1031 exchange
• Should an installment sale be considered
• How seller financing might affect the transaction
• How to handle casualty losses or thefts
• Regularity of buying and selling properties
• Flipping some properties and renting

There are more considerations but this gives you an idea.

The choices you make can improve your current income picture or assist in capital growth. One needs to remember that capital growth is far more than property appreciation. Every payment made on a property builds equity. Many investors will have a loss carry forward that can be used to reduce future capital gains and depreciation recapture which aids in capital growth.

BawldGuy Here: Don’t let that last sentence get past you. I’ve written a post that should be published Tuesday on BiggerPockets that will, in rich detail, address how using multiple strategies synergistically can work to create stellar results. One of the strategies I’ll be talking about involves the concept of ‘loss carry forward’.

In short waiting until tax time to do your tax planning is a sure way of limiting your choices and will lead to less than optimal investment results. Every investor’s situation is different and for some, tax planning will be less necessary, while for others it can make huge differences.

Good tax planning though starts with having an investment plan and looking at your whole situation so that each transaction can produce the maximum benefit for your current and future investment situation.

Related posts:

1. A Purposeful Plan — It Works Every Time
2. How A Purposeful Plan Makes Use Of A Partial 1031 Tax Deferred Exchange — A Case Study
3. Real Estate Investment For Retirement — The First Step In A Purposeful Plan
4. Even Before The First Step In A Purposeful Plan
5. Can Flipping Be Integrated Into A Prudent Purposeful Plan?