Articles on Tax Reduction

That Awesome Deduction That You Do Not Have To Pay Cash

For, Yet It Generates Cash Flow In Your Pocket?

File Amended Returns For Hidden Savings!

Will Wholesaling Make You a Dealer?
 

Can You Do A 1031 Exchange on a Quick Flip?

Can You Do A 1031 Exchange on a Quick Flip?

The Six Key Questions To Ask a Prospective CPA
And Quickly Weed Out The Losers!

Eliminate IRS Fear By Knowing Your Rights And “Hidden” IRS

Weaknesses!






That Awesome Deduction That You Do Not

Have To Pay Cash For; Yet It Generates Cash

Flow In Your Pocket?
_______________________
Albert Aiello, CPA, MS Taxation

I am talking about the most powerful deduction for the real estate

investor – Depreciation -- which is an annual tax write-off of the

cost basis of assets held for rental or business-use, such as real

estate.

Why this “NO-cash-out; yet cash-IN” phenomena?

The first part, “NO cash out” is because the determination of

depreciation is based on the entire cost of the property, regardless

of how the property is financed. So you can do what is so

frequently done, put little or no money down on a property and still

take depreciation on the entire cost of the depreciable property.

That is, you do not have to spend any cash for valuable

depreciation deductions.

The second part, “cash IN” is because of the tax savings

generated by depreciation, especially with componentizing

(discussed later). That is you pocket the tax savings, while the

property is appreciating. For example, a $20,000 depreciation

deduction reduces your ordinary income. In a 30% bracket this will

save you $6,000 in taxes. This is like found money because you

did not have to spend any additional cash to get the deduction.

The $6,000 as a 10% down payment can allow you to buy an

additional $60,000 worth of real estate, which, at a 20% yearly

return, would be $12,000 more income every year. Plus, like money

in the bank, you get the deduction and tax savings every year (for

the recovery period of the property). Yet, when you sell, you can

have no recapture and thus not have to pay any of these tax

savings back by selling the property, tax free, via the powerful 1031

Exchange or other tax-free selling strategies. You still continue to

pocket the tax savings from depreciation! You get the best of all

worlds! Get the picture? Money makes money but saving taxes

(every year) makes a whole lot more money, so you can get richer,

faster!!

So how can you make this already valuable deduction save you

even more money? Componentize!

Componentizing (or Cost Segregation Analysis) is something that I

have been using for over 25 years to dramatically increase my

cash flow (and wealth) via tax savings from much larger

depreciation deductions.

Reason: With componentizing, you break out components, from the

property cost, that allow you to use shorter recovery periods with

the result of much larger deductions and savings. For example

there are many items that can qualify for personal property and be

rapidly written off over 5 years (double-accelerated) instead of

slower building depreciation of 27-1/2 or 39 years straight-line (or 6

times faster than the building). There are land components that too

can be rapidly written off over 15 years (accelerated) instead of 27-

1/2 or 39 years straight-line (or 2 to 3 times faster than the building).

Moreover, with my Goldmine system of componentizing, you can

justify a low or no land value for even more deductions and

savings.
 

Furthermore, you can also fully deduct the remaining basis of

components that are replaced.
 

For example, if you replace existing property components with a

remaining componentized cost basis of $30,000, you can claim the

entire $30,000 as a full ordinary deduction. In a 30% bracket this

puts $9,000 of savings in your pocket, yet you did not have to

expend cash for the deduction!

So how much extra did you pay in taxes not using \ componentizing

because your tax advisor did not know about this incredible legal

strategy?

According to the follow quote from one of my students, probably a

lot!

“Al, your component depreciation method saved me almost

$20,000 dollars in income taxes. It helped me financially having

four girls in College at the same time.”
 

...Angelo D. Guerra, Investor, Broker/Owner, ERA Platinum

Realtors, Conshohocken, PA.

By the way, that’s $20,000 a year, which if invested at 10% a year

for the next 10 years would accumulate to over $318,000! But with

real estate the returns are even greater; so if at 20% for the next 10

years, the savings would accumulate to over half-million dollars,

which is what you are really losing without this great wealth system

that has been around for over 40 years!!
_____________________________________________________________
The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. Visit Al’s web site at REINFO.COM or call 215-271-1998

__________________________________________________________

File Amended Returns
 

For Hidden Savings!
_______________________
Albert Aiello, CPA, MS Taxation

In my former days of being in tax practice I literarily did

hundreds of amended returns for refunds of past paid taxes

because of missed deductions or strategies. Here were the

results:

_ First off, NOT one got audited (they usually don’t).

_ Most of the taxpayers were real estate investors because real

   estate is where most of the tax savings are. Most real estate

   investors have the potential for cash refunds.

_ You can amend, not just for one year, but for three years so it

   could be three years worth of refunds (plus some interest).

_ For missed depreciation there is no statutory limit as to the years

   you can go back, so it could be many years worth of refunds,

_ Refunds are often large, sometimes astronomical (as high as 

  $50,000 or even more) – like “found money” that you can reinvest

   for more income.

Some items for which you can file

amendments for:

_ Depreciation on rental properties

_ Other missed deductions such as tuitions for real estate courses, 

   conferences and boot camps

_ Depreciation on business equipment or automobile
 

_Other missed business expenses such as auto, leasing, travel,

   marketing, etc.

_ Any other deductions or business expenses for which you have

   back-up proof

_ Tax overpayments, such as social security taxes that should not

   have been paid on passive income.

For amending returns individuals generally file IRS Form 1040X.

Go for that found money!
_____________________________________________________________
The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. Visit Al’s web site at REINFO.COM or call 215-271-1998
__________________________________________________________


Will Wholesaling Make You a Dealer?
_______________________
Albert Aiello, CPA, MS Taxation

Wholesaling is quickly selling a property “as is” with little or no fix-

up. Many times the entrepreneur never goes to settlement and will

just assign (or “flip”) the agreement of sale to their buyer for a

quick profit. Wholesaling can be a lucrative cash-profit business.

But will it make you a “dealer”? That all depends, but first some

background. Being tagged as a dealer could be a financial disaster

because, unlike an “investor”, you are subject to the highest

ordinary income tax rates, plus Social Security taxes, other

employment taxes and possibly alternative minimum taxes. Thus,

50% or more of your hard earned profits could be drained by taxes.

Moreover, dealer profits (cash or paper) are immediately taxed in

full and cannot be tax-deferred in any way including not being able

to use a 1031 exchange, installment sale reporting, a self-directed

IRA, certain trusts or any other tax deferral strategy. Being tagged

as a dealer could wipe you out! It’s like being condemned to hell!!

On the other hand, if you demonstrate status as an “investor” you

can be “saved” and avoid these expensive pitfalls of being a

dealer.

First off, just because you start to flip properties does not mean you

are a dealer. Based on numerous tax courts cases (including a

Supreme Court Case); actual IRS audits; and my extensive

research; with planning, even a very large number of flips (in one

year) could avoid costly dealer status. Altogether, there are over 30

strategies to avoid the costly consequences of a dealer. My

experience indicates that one of the best strategies is investment

intent. That is, demonstrate that the primary purpose of the quick

sale profits is for investment purposes and not sales speculation.

For example, the primary purpose (or purposes) of the quick sale

profits can be for a number of “investment necessities”, such as

down payment funds to acquire long-term investment keepers, or

working capital for property investment operations including

preventive maintenance.

With this premise, tax follows economics as opposed to sales

speculation with tax avoidance motivation. That is economics first!

Accordingly, as employed here, these flips are non-dealer,

investment transactions with solid economic foundation. This is a

very powerful defense against any IRS attacks. Consequently,

there are numerous cases and scenarios, some of which I have

had first hand experience with, where even a huge number of sales

in one year did not cause dealer status.

Moreover, there has never been an issue of civil or criminal fraud

with the issue of investor versus dealer. Entrepreneurs have

literally sold hundreds of units in a short time; claimed not to be a

dealer without issues of fraud and, with the right planning and

documentation, even won their case. Reason: The issue is a very

arbitrary question of fact and not of law. Accordingly, asserting any

type of fraud (where the burden of proof shifts to the IRS) is very

difficult and almost impossible. Therefore, real estate

entrepreneurs have everything to gain and little (if any) to lose.

They should do so by planning in advance with dealer-avoidance

strategies (especially investment intent); avoid inept advisors; and

GO for it!
_____________________________________________________________
The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. Visit Al’s web site at REINFO.COM or call 215-271-1998


__________________________________________________________

Can You Do A 1031 Exchange on a Quick Flip?
_______________________
Albert Aiello, CPA, MS Taxation

The answer is yes, provided you know the law in depth and plan

accordingly. But first some background.

A 1031 exchange is a great way to create wealth by saving

substantial taxes on the sale of investment property by reinvesting

the untaxed sales proceeds in a replacement (investment) property

within the IRS requirements of Section 1031 including the

applicable regulations, rulings, and tax court cases. One of these

requirements is that the properties in the exchange must be held

for investment or business use This requirement is known as the

“holding requirement”. The IRS interprets this “holding

requirement” to mean that the relinquished and replacement

property must be held for a certain time period. Therefore

conventional thinking is that a quick flip of a property will not qualify

for the tax deferral benefits of a 10

31 exchange, because of this

exchange holding requirement.
 

But this is based on IRS interpretation which does not have the

force or effect of law. (The IRS does not have the authority to make

laws; only congress does). Accordingly, the tax law does not give

any specific, objective time period requirement. In other words,

there really is no statute as to how long a property must be held

before it qualifies as held for investment. A full-blown discussion of

the background of all of this is beyond our scope. However here is

an overview of some bottom-line recommendations to help you

qualify for 1031 tax-free treatment on quick sales.

1. Know the tax law citations that support quick sales as

exchanges. There are numerous cases. One is Rutherford, where

the transfer was immediate. Others can be reviewed with a

competent 1031 exchange specialist.

2. Avoid being a dealer especially by documenting investment

intent. This was discussed in a another article titled, Will

Wholesaling Make You a Dealer?

3. Hold the purchased replacement property for at least 2 years

under the “Economic Unit” and “Continuity of Investment” doctrines

> the foundation of qualifying exchanges. This is a strong indicator

of investor status, even on the quick selling side of the relinquished

property. Reason: These fundamental theories indicate that the

relinquished and replacement properties are together as one unit

where there is a long period of ownership and a very strong

argument for investment intent and investor status. Therefore,

under these doctrines, the longer holding period of the keeper

replacement property should carry over to the short “flip” period of

the relinquished property. Dating back to the 1920’s, these

doctrines are foundational and thus a powerful defense against the

IRS. (I know, as I have successfully used them in opinion letters for

IRS examinations.)

4. Audit-Proof your exchange by audit proofing your taxes. If there

is no audit there are no issues and no worry. “Audit-Proofing” (not

getting audited) is the first rule of tax-reduction planning.

Understand that nothing being done here is illegal, but is based on

legal positions. So while you are taking such positions, you still

have the legitimate right to employ audit proofing steps. One such

step is to report all property transactions (including exchanges) on

partnership form 1065. At the present time, partnership returns

(form 1065) are audited less than other forms including Schedule E

and corporation returns, 1120 or 1120S. (Because of its many tax

disadvantages, you should not hold real estate in any type of

corporation, anyway.) You should also properly complete form

8824 which is the specific IRS schedule for reporting 1031

exchanges. It is a supporting schedule to tax reporting forms (such

as form 1065) and is the only exchange form that actually goes

directly to the IRS. The complete and accurate filing of 8824 would

mostly likely reduce your chances of an audit. You also should

engage a Qualified Intermediary (QI) that specializes in complex

exchanges, such as those combined with quick sales.

_____________________________________________________________
The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. Visit Al’s web site at REINFO.COM or call 215-271-1998


The Six Key Questions To Ask a Prospective CPA
 

And Quickly Weed Out The Losers!
________________________________________________________
Albert Aiello, CPA, MS Taxation, RE Investor

Q1. How much is 2 + 2? If they say "4", don't hire them. However if

they say, "What would you like it to be!"...Then this may be the one

to hire. I am not in any way advocating anything illegal. I am simply

using humor to get this point access - You do not want someone

who is overly conservative. A conservative tax advisor is like a slow

race horse -- worthless! On the other hand, you do not want the tax

advisor to be reckless, blundering, and imprudent. Remember the

overall objective is to both maximize tax savings and minimize IRS

problems. So the real Q is - Do you maximize tax savings yet

minimize IRS problems?

Q2. Are you PRO-real estate? They should be! How many real

estate investors do you have as clients? The more the better,

although not too many. Beware of the mass production guys that

just "pump out" thousands of returns. You do not want to be a

minuscule part of a "paper mill".

Q3. Will you help me plan my taxes to ensure the best possible

outcome under different scenarios? You do not just want a "bean

counter" or "glorified bookkeeper" to simply put numbers on a form.

You want someone not only to prepare your return, but also to plan

it. Expect to pay more for this. However, the additional investment

could save you significantly.

Q4. I own rental properties. Do you have any ideas on how to

increase my property deductions? Of course the best answer is the

componentizing depreciation system (or cost-segregation analysis).

If they don’t say it, or at least suggest something good, move on.

Q5. What steps do you take to reduce the chances of my return

being audited? This is an excellent test of their knowledge and

willingness to be diligent and concerned about your tax situation.

There are over 30 Goldmine audit-proofing techniques. If the

prospective CPA does not know about any, move on.

Q6. Can you provide references from real estate investor clients as

to your quality of service? When you are checking with the

reference ask specifically, why they like the tax advisor. For

example, Did they come up with tax-saving ideas that others did not

think of? Were they very thorough by explaining your tax situation?

Did they call you during the year to make tax-reduction

suggestions?”Would you recommend them to your mother?”
 

If you do not get good answers, move on.
_________________________________________________________________________

The above are brief excerpts from the home-study course - The Real Estate Investor’s Goldmine of Brilliant Tax Strategies - by Al Aiello. Visit Al’s web site at REINFO.COM or call 215-271-1998.


Eliminate IRS Fear By Knowing Your Rights And “Hidden”

IRS Weaknesses!

___________________________
Albert Aiello, CPA, MS Taxation

FEAR-OF-THE-IRS is one of the big reasons why entrepreneurs

unnecessarily fork out way too much in taxes. Well, eradicate the

fear because you have rights against the IRS. IRS employees can

lose their jobs because of ten possible offenses, including a

violation of constitutional or civil rights of taxpayers. You can sue

the IRS for up to $100,000 of damages caused by an IRS

employee who negligently disregards the tax law and up to a

$1,000,000 if an IRS employee willfully violates the tax law.

Also, IRS “hidden weaknesses” can help you. For example, in an

audit, you have a much better chance on winning by going to

appeals. Statistics show that the average results on appeal are a

40% reduction in taxes. But only one out of 16 audited taxpayers

goes to Appeals. (This is because taxpayers or their tax preparers

are afraid to do so, or many tax preparers do not know how to do

the Appeals process. ) The Appeals (or “Appellate”) level of the

IRS is not a court, but an informal hearing with an “Appeals

Officer”, who has a different job than auditors at the examination

level. Their job is to settle cases and avoid the “hazards of

litigation”, such as the cost of going to court and the IRS losing.

(You do not need an attorney to represent you before Appeals,

although you should use a competent tax specialist who could be a

CPA or a tax attorney.)

Knowing your appeals rights from the outset of an audit can give

you more confidence and strengthen your position throughout the

audit. IRS auditors are evaluated by how many cases they close.

They therefore do not want your case to go to Appeals. Just, by

saying. “OK if you’re going to play hardball, I got hard bats. I don’t

even want to waste my time to talk to your manager. Stop now as I

will settle this in Appeals.” This will have a real impact on the

auditor. They would realize that you know the rules, you are not

playing games and are not easily intimidated.

Even better, knowing your rights from the outset and knowing how

the system works, can have an impact on your taxes before you

are ever audited (if you are ever audited). For instance, if you

discreetly take aggressive positions on gray* areas, you know that

you have a good chance of winning by going to Appeals, or by

stating that you will go to Appeals, with the good possibility that the

IRS auditor will back off, as per the above.

Plus, even better, there are audit-proofing techniques (discussed in

other articles) that you can employ so you do not get audited in the

first place. But if you are audited, you have an ace in the hole –

Appeals.
_____________________________________________________________
The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. Visit Al’s web site at REINFO.COM or call 215-271-1998