Loopholes Keep the Taxman Away

By Christopher M. Leporini, REALTOR® Magazine

Real Estate Loopholes: Secrets of Successful Real Estate Investing By Diane Kennedy and Garrett Sutton (Warner Books) 213 pp., $16.95
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Real Estate Loopholes: Secrets of Successful Real Estate Investing continues the “Rich Dad’s Advisors” series with advice on how readers can capitalize on the tax advantages available to real estate investors to gain the maximum benefit from their properties. Whether you invest or you have clients who do, this book provides the know-how to do it wisely and have investments pay off.

Entrepreneur and real estate investor Robert Kiyosaki found a winning formula by contrasting the lessons that his financially unstable father and his mentor, a self-made millionaire, taught him about money. Espousing the pro-investment philosophy that the “the poor and the middle class work for money,” but “the rich have money work for them,” Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money—That the Poor and Middle Class Do Not! became a bestseller, inspiring several sequels from Kiyosaki and his co-writer Sharon L. Lechter, as well as the “Rich Dad’s Advisors” spin-off series, penned by other experts.

Authors Diane Kennedy and Garrett Sutton both have solo writing credits to their names for previous “Rich Dad’s Advisors” titles. Kennedy wrote Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax and Sutton authored Own Your Own Corporation andHow to Buy and Sell a Business. Real Estate Loopholes distills their experiences into a relatively reader-friendly format that includes anecdotes illustrating loopholes and investment strategies in practice.

In addition to sections on tax and legal secrets, the book also provides criteria and formulas to evaluate potential real estate investment properties. The book covers only seven of the more than 100 loopholes available for real estate investors, according to the authors. For information on other loopholes, they recommend going to http://www.taxloopholes.com for tax strategies and free tax tips.

Tips for Real Estate Professionals

  • Real Estate Professional. As a real estate professional, you can offset unlimited real estate losses on the properties you own against all other forms of income. If you file a joint tax return with your spouse, you can offset all real estate losses by the total income of the household. In many cases these are only paper loses. For instance, the government allows you to take a deduction for depreciation losses on real estate, even if the value of the property has actually gone up.
  • Sell Now, Tax Later. You can use several strategies to postpone paying taxes on gains you make from property sales, according to the book. For example, you can set up a charitable remainder trust (CRT). This is an irrevocable trust, which means that you can’t change your mind once the CRT is put in place. The CRT provides for and maintains two sets of beneficiaries—income beneficiaries and charitable beneficiaries. The income beneficiaries, likely you and your family, receive a set amount of income from the CRT during their lifetime. The charitable beneficiaries then receive the principal upon your death. The CRT is a good strategy for someone who has a highly appreciated piece of property and a charitable heart. The CRT works like this. You donate a property to the CRT and then receive an income tax deduction; the amount of the deduction is calculated as the present value of the remainder amount that will eventually go to the charitable beneficiaries. The CRT can then sell the property without paying taxes on the sale and reinvest the total amount for the benefit of the income beneficiaries. According to the book, the amount that the income beneficiaries will receive depends on the payout percentage that has been established and the amount of income the assets generate within the CRT.
  • Real Estate Investing With Your Pension Plan. Do you have a self-directed pension plan, such as an IRA, Keogh, SEP, or Roth IRA? If so, you can use the funds to invest in single-family and multi-unit homes, apartment buildings, co-ops, condominiums, commercial properties, improved or unimproved land, subject to certain restrictions. Among these restrictions are rules prohibiting you from:
    • Purchasing property that you personally own or have previously owned. Additionally, your spouse and members of your family, except for siblings, cannot have owned the property.
    • Purchasing the property for any reasons other than investment purposes.
    • Live in or lease the property. Nor can your spouse or any member of your family, except for siblings, live in or lease the property.
    • Locate your business on any part of the property.

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This post was contributed exclusively for REALTOR® Magazine.

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