How Real Estate Investors Can Minimize Income Taxes

Most Real Estate Investors have heard of the 1031 Exchange.

Did you know there are 17 different tax minimization solutions for reducing, deferring, or completely eliminating the tax bill on the sale of a Primary Residence, Second Home, or Investment Property.

In this series of posts we will discuss the 17 Real Estate Tax Minimization Options available to you in five categories. The sixth category is Income Tax Reduction with four options to choose from.

Category 6: Income Tax Reduction

Unlike the previous options we discussed in this series, Income Tax Reduction is not specific to real estate. This option reduces your income taxes whether they are ordinary income, W2 income, capital gains income, or anything else.

Income Tax Reduction strategies allow deductions against your Adjusted Gross Income by up to 50%. For example, if your adjusted gross income is $500,000, you can reduce your taxable income by up to 50% or $250,000.

For Example, let’s say you sold your investment property but did not do a 1031 Exchange or any of the other tax minimization options above.

Let’s explore these options below.  

Income Tax Reduction Options:

These options can be “stacked” with other Tax Minimization options like depreciation for example to dramatically reduce your taxable income.

1.     Oil & Gas Investments

Oil & Gas investments allow you to deduct your gross taxable income by 85% of the investment amount.

For example, Jim made a $100,000Oil & Gas investment. He can deduct 85% or $85,000 from his gross income before deductions. Next deductions are applied to determine his adjusted gross income or AGI.

Oil & GAS investments can provide significant returns in a relatively short time, but they are high risk and not for everyone. Exploring Oil & Gas investment risks and how they work is beyond the scope of this document.

2.     Historical Preservation Easement

An Historic Preservation Easement is a real estate investment designed to preserve historical buildings. By investing in registered historical real estate, every dollar you invest creates a $2.50 charitable contribution for up to 50% of your taxable income (AGI) plus a preferred return on this investment for 5 years and the return of capital in year 6 with appreciation, if any.

Let’s walk through an example…

Betty is a consultant and is projecting her adjusted gross income to be about $500,000. By investing$100,000 in a Historical Preservation Easement, Betty can take advantage of the2.5 to 1 deduction and reduce her AGI to $250,000.

Now Betty’s state and federal taxes are based upon her new AGI of $250,000. Her $100,000 investment is now the basis of a real estate purchase. She will earn income from this investment for5 years and in year 6 the property will be sold.

Upon sale, Betty will receive her investment capital back plus any appreciation. This strategy typically saves more money in taxes than the cost of the investment and you get your original investment back plus income.

3.     Fee Simple Donation

A Fee Simple Donation is a non-cash charitable contribution. By investing in a real estate partnership, every dollar you invest creates a ~$5 charitable contribution for up to 30% of your taxable income. In addition, ~10% of this investment is placed into an investment account that will be returned to the investor plus any income generated after the audit window is closed or any audits are completed.

Let’s walk through an example…

Tim is a real estate developer and is projecting an adjusted gross income to be about $1,000,000. By investing$60,000 in a Fee Simple Donation, Tim can take advantage of the 5 to 1deduction and reduce his AGI by $300,000. His new AGI is $700,000.

Now Tim’s state and federal taxes are based upon his new AGI of $700,000. This investment is a one-time investment with no returns beyond the tax savings.  

This strategy typically saves more money in taxes than the cost of the investment.

4.     Historical Preservation Easement & Fee Simple Donation Combo

By combining the Historical Preservation Easement with the Fee Simple Donation, we can take the best of both solutions and apply them both to this year’s tax bill.

Let’s walk through an example…

Anthony and Sara are married and filing a joint tax return. Their combined AGI is $1,000,000. By combining the Historical Preservation Easement with the Fee Simple Donation, they can make a smaller investment to reduce their taxable income by up to 50% and take advantage of the additional returns provided by the Historical Preservation Easement.

How does this work?

By investing $60,000 in the Fee Simple Donation, the couple reduces their AGI by 30% or $300,000. If they use an Historical Preservation Easement, they can reduce their AGI by 50%, but the Fee Simple already took 30%.

They have 20% or $200,000 in additional savings available to them. So they invest $80,000 in the Historical Preservation Easement at 2.5 to 1 to get an additional $200,000 tax deduction reducing their AGI by 50%.

-         20% or $200,000 deduction for $80,000 via the Historical Preservation Easement

-         30% or $300,000 deduction for $60,000 Via the Fee Simple Donation

-         Total Investment of $140,000 for a 50% tax deduction or a $500,000 deduction

If you'd like to pay less in taxes, schedule a complimentary consultation with a Tax Strategist atDeferTax.com today! Call 877-829-7927 or book an appointment here…

Summary,

Even if you missed the opportunity to use the other tax minimization options in this blog series, you could still reduce you taxable income by leveraging the options in this post.

Remember…

Oil and Gas investments reduce gross income, Historic and Fee Simple reduce AGI.

All the strategies in this post must be completed in the tax year the income was earned. The Historical and Fee Simple solutions are charitable contributions. If you made other charitable donations this year, have a foundation or 503(c), these solutions share the same set of limits. So, we need to speak with your CPA before investing.

These are complex strategies and should be explored with the help of an expert who places your best interests first. Let’s face it, if someone has one or two options, they are not a tax strategist. They are a salesman trying to sell you their product.

We have over 40 tax minimization options on our platform. We are nationwide educators and keynote speakers on Tax Minimization. We are also real estate investors, business owners, homeowners, and high income earners. We use the strategies we recommend!

Once you pick the right strategy that is right for you, we connect you with our network of vetted providers that are “best in class” in the industry. How do we know that? We use them ourselves. You can work with one of them or someone else. It is entirely up to you.

I hope you found this document informative. We have more detailed content and videos on this tax strategy at DeferTax University. Click here to learn more.

Our exploration of real estate tax minimization in this series is complete. If you’re interested in exploring tax minimization for other asset types, check out our website at DeferTax.com.

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