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Master Real Estate Investing Taxes: Insider Tips for Success

Welcome to Propelio TV’s “Pain & Gainz Show”! I’m TJ Cozen, here with my beautiful co-host Kelly Smith. Today’s episode is all about the serious topic of taxes for real estate investors. We’ve got Michael Plaks, a real estate taxation specialist, joining us to shed light on this complex issue.

Why Making Money Should be Your Top Priority

When you dive into real estate investing, your main focus should be making money, not chasing tax deductions. Yes, deductions are important, but they shouldn’t be your primary concern when starting. Real estate is about wealth-building first. Let’s break down why this is crucial and how to organize your finances once you start making that money.

Wholesaling: Understand Your Deductions

Wholesaling is often the first step for many real estate investors. The key to success here is meticulous record-keeping. Here’s what you need to know:

Use an Expense Tracking App

Gone are the days of stuffing your car’s console with receipts. Use expense tracking apps like Expensify or QuickBooks for Self-Employed. Snap pictures of receipts, categorize expenses, and let the app do the organizing.

What Expenses Are Deductible?

For wholesalers, several expenses can be deducted:

  • Marketing Costs: Ads, flyers, mail campaigns.
  • Driving/Mileage Expenses: Track your miles for property visits.
  • Supplies/Office Expenses: Anything that helps run your business.

These deductions can significantly lower your taxable income, increasing your take-home pay.

Paying Yourself: The Right Way

Another big question is how to pay yourself. It’s simple: transfer money from your business account to your personal account. Do not complicate things with payroll unless you have a set-up corporation. Here’s a quick guide:

  1. Make money.
  2. Transfer it from your business account to your personal account.
  3. Pay yourself.

Flipping Houses: Detailed Tracking Matters

When you move from wholesaling to flipping, things get more complicated, especially in terms of expenses and deductions.

Track Expenses Per Property Separately

You must separate expenses for each property. Here’s why:

  • Rehab Costs: Deductible only when the property is sold. This can be tricky because if you don’t sell by year-end, those expenses carry over.
  • Itemized Invoices: Always get detailed, itemized invoices from your contractors. Classify every cost item to maximize deductions. For instance, carpets and appliances are often deductible immediately, while things like roofs are depreciated over nearly 30 years.

Rental Properties: Think Long-Term

Owning rental properties introduces another layer of complexity. You need to keep detailed records similar to flipping but also consider long-term deductions.

Immediate vs. Depreciated Deductions

  • Immediate Deductions: Carpets, appliances, certain cabinets.
  • Depreciated Over Time: Roofs, fences, glue-down tiles.

Keeping thorough records ensures you optimize your tax position.

Owner Financing: Proceed with Caution

Owner financing is a viable strategy but remember: it’s not investing in the traditional sense. Here’s why.

Long-Term Wealth vs. Cash Flow

Owner financing shifts you from asset-building to cash-flow generation. With rentals, properties appreciate, adding to your wealth. But in owner financing, you trade long-term wealth for short-term cash flow.

Tax Implications: Rentals vs. Flips

  • For Rentals: The tax scenario is fairly straightforward, with gradual taxation based on payments received.
  • For Flips: It gets brutal. You might owe taxes on profits you haven’t even collected yet. Consult a tax professional before diving into this.

Common Mistakes and How to Avoid Them

Not Planning for Your Tax Bill

Estimated taxes are crucial. Skipping this step can lead to a hefty year-end tax bill.

Personal and Business Expenses: Keep Them Separate

Never pay personal expenses from your business account. Employ a two-step process:

  1. Transfer money to your personal account.
  2. Pay personal expenses from there.

Not Separating Income and Expenses by Property

For flippers and rental property owners, never mix expenses. Use separate buckets for each property and one for general business expenses.

Business Entities: Do it Right

Consult Both Attorney and Tax Professional

Setting up businesses entities like LLCs or corporations requires careful planning. Improper setup can result in missed deductions and increased liability. Always consult both a tax professional and an attorney.

When Entities are Mandatory

For specific business models like owner financing, having an entity becomes essential to maximize tax efficiency.

Monthly Estimated Taxes: A Game Changer

Forget quarterly estimates. Doing it monthly aligns better with your regular bills and can simplify tax payments.

Working with a Tax Professional

Find a real estate taxation specialist who understands your business. They offer all-inclusive programs covering bookkeeping, tax preparation, and long-term planning.

Educational Resources: Stay Informed

Michael Plaks offers numerous online resources, recorded classes, and active participation in Facebook groups like “REI Tax and Legal Wizards”. Check these out for in-depth learning.

The Final Five: Get to Know Michael

  1. If money were no object, what would you do?
    • Teaching. Michael loves imparting knowledge, especially in subjects like math and science.
  2. What is something you’re not good at?
    • Singing. Michael claims it’s his weak point.
  3. Dream home location and type?
    • A lake house in a quiet, wooded area where he can have peace and quiet.
  4. One extravagant purchase?
    • An animal rescue shelter. Michael is passionate about animal welfare.
  5. Desired welcome at the pearly gates?
    • “Welcome in!” rather than “Sorry, we’re closed.”

Closing Remarks

Mastering real estate investing taxes is pivotal for maximizing your profits and sustaining long-term success. By focusing on wealth-building, maintaining meticulous records, and leveraging expert advice, you can navigate the complexities of tax deductions, expense tracking, and strategic planning. 

Whether you’re wholesaling, flipping, managing rental properties, or exploring owner financing, understanding the tax implications and keeping your finances organized will empower you to make informed decisions. Remember to consult with a real estate taxation specialist like Michael Plaks to ensure you’re optimizing your tax strategy and staying compliant with regulations. Stay educated, stay organized, and let your investments thrive!

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