It’s that time of the year! Year End Tax Planning is very important for especially for real estate investors. A lot has happened this year in the real estate market and the general economy. It impacts the portfolio of many Real Estate Investors in many ways. Not just value of the holding in our hands, how we want to invest in coming years and even our retirement. It also impacts tax issues that will be confronting us in the upcoming tax filing season. There is also preparation we have to do in our tax planning with a view of the economic trend in the coming year. Now is prime time for investors to put tax-planning strategies into place that can help reduce their liability for 2013.
December 31 marks the cutoff date for delaying income, accelerating deductions, gifting appreciated assets for the current filing year. Anytime from September through November, taxpayers should be thinking about year end tax planning. To be able to plan ahead, you have to know where you are.
End of Bush-era Tax Cuts
The advice is even more crucial this year for high-income earners, as many of the Bush-era tax cuts expired this year for those in the highest tax brackets.
For 2013, married couples filing jointly with taxable income greater than $450,000 will face a new 39.6 percent top marginal income tax rate, plus a bump to 20 percent, up from 15 percent, on qualified dividend and long-term capital gains.
Joint filers earning more than $250,000 will also be subject to a new 3.8 percent Medicare surtax on net investment income.
Taxpayers looking to keep more of their money from Uncle Sam this year need to start with a forecast and need to pay special attention if their income threshold has changed. Generally speaking, if a taxpayer expects to be in the same or a lower tax bracket next year it’s best to defer as much income as possible until after the year-end. Strategies that work include deferring year-end bonuses until January 2014, delaying the exercise of incentive stock options and postponing receipt of distributions beyond the required minimum from individual retirement accounts. Such taxpayers should also consider accelerating deductions.
This can occur by using various strategies, including: taking advantage of flexible spending accounts; maximizing pretax contributions to a 401(k) plan; prepaying deductible mortgage interest, real estate taxes and charitable contributions; making alimony payments early and paying out-of-pocket medical expenses to the extent they are deductible in December rather than January.Conversely, those likely to be in a higher tax bracket next year should accelerate income and defer deductions.
Capital Gains
Investors can also minimize their capital gains tax bite by selling stocks and mutual funds that have lost in value before the end of the year. The Internal Revenue Service allows investors to offset capital gains with capital losses dollar for dollar.
Any excess capital loss can be used to offset other income, up to $3,000 per year. Leftover capital losses beyond that can be carried forward to offset gains and income in future years.
Additionally, there are new tax rules for estate planning. Instead of an emphasis on avoiding estate taxes, you may want to look at plans that focus on trimming income taxes.If you are planning to leave an estate to your heirs, you can also reduce and potentially eliminate the tax bill this year by gifting appreciated stocks to someone in a lower tax bracket, like a child. For example, if a child is in the lowest (10 percent or 15 percent) tax bracket with little earned income, they’ll pay no tax when they sell the stock.
Charitable Donations
Investors can donate appreciated property instead of cash to a charity, which yields even more savings because an individual can deduct the property’s fair market value on the date it gifts and avoid paying capital gains tax on the appreciation.
Before making a donation, however, investors are urged to check and ensure they are eligible to claim charitable donations as a deduction.
Pease Limitation
Fiscal Cliff legislation reintroduced the Pease limitation which will be felt by high income earners. While the American Taxpayer Relief Act of 2012 reduced the impact of the Pease limitation it can greatly limit itemized deductions.
The Pease limitation reduces the amount of itemized deductions like mortgage interest and charitable gifts, that married taxpayers filing jointly and earning more than $300,000 can claim. (The income threshold for single filers is $250,000.)
Year end tax planning is essential for taxpayers in every income tax bracket.
Here are some recent questions from my blog…
Question: “I was wondering what the tax difference is between selling a home before owning it for one year or after owning it for a year.. Is there a set tax percentage rate for both?”
My Answer: The main difference if it is a property held for investments is that the short term capital gains rate is your effective tax rate which can range from 10{6f8a1d7e9c2e1391bb9a4f8ef6787161bf7ec0d1545521b48058899ec1270ca5} – 35{6f8a1d7e9c2e1391bb9a4f8ef6787161bf7ec0d1545521b48058899ec1270ca5} but a long term capital gains rate is 15{6f8a1d7e9c2e1391bb9a4f8ef6787161bf7ec0d1545521b48058899ec1270ca5}. There is a set tax {6f8a1d7e9c2e1391bb9a4f8ef6787161bf7ec0d1545521b48058899ec1270ca5} for the long term but the short term is based on your individual tax rate. Keep in mind however that if this is a rehab propertyv (meaning if was not held for investment but for resale) then the length of time does not matter as the profits are treated as business income subject to the Self Employment tax and the regular tax.
Question: “I just bought a SFH through my LLC and I’m still not sure if I’m going to flip it or rent it. One thing weighing on my decision are taxes. If a single-member LLC owns a property, rehabs it, and sells it, are the profits deemed “business income” or “capital gains”? If I owned a home in my name, personally, I would probably rent it out for at least a year before thinking of selling in order to avoid short-term capital gains. Does this work with business owned properties as well?”
My Answer: Business income is subject to self employment taxes. Yes, if the business is a pass through entity, then it follows the same rules as our individual tax return rules.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. Contact us for more information at 1.888.502.3767
