Tax Increase Or Tax Relief: It Is Your Choice

Pondering today’s current economy and the likelihood that capital gains and income tax rates will increase next year ignites fear and confusion for countless numbers of Americans. For many taxpayers, the future appears to be downright frightful, resulting in a new wave of terror that strikes their hearts. They may even take an impaired view and see only one result when they read the letters I…R… and S. Have you ever noticed that the words “The” and “IRS” when coupled together spells “THEIRS!”?

The reality, though, is that those who view the current circumstances from this perspective are only victimizing themselves. The trick in maintaining sanity during this time of economic and tax upheaval is to forget about what you cannot control and focus on those things you can. The fact is you can manage your taxes and most likely win out in the end.

Solving Tax Problems and Gaining Greater Benefit

To illustrate, concerns about capital gains and other taxes may be troublesome. You may have owned an apartment building for several years and now would like to sell, relax and enjoy the equity and income benefits your hard work has earned you. Your CPA, however, has reported that you would be obligated to pay substantial capital gains taxes if you sold your property. What do many property owners do when they get this news? Unfortunately, they do nothing, except remind themselves of what their accountant told them: “Nothing can be done but to pay the taxes.” Right? WRONG!

Before you list your property for sale, it is important for you to learn what tax planning alternatives are available to meet your specific needs. If you search them out, you will discover that tax law does offer some pretty great solutions. You may, for example, be able to defer the taxes for up to 30 years or eliminate them entirely. If your mortgage to be paid off is greater than what your basis is for the property, you’ll learn that the taxes for “debt relief” can be solved. And at close of escrow, you may find that it is possible to enjoy greater income than what you had by owning the property you sold. But you will never know unless you take charge of your circumstances and learn your options. You must become proactive and find out the right solutions for you. Here is what one real estate investor experienced:

Troubled about her real estate portfolio valued at $800,000, this 54-year old lady wanted to sell the properties, replace the income she received from the real estate and reduce her income taxes. She was stunned to learn, however, that, according to her CPA, she would be obligated to pay more than $200,000 in capital gains and other taxes if she sold her properties and little, if anything, could be done to lower her income taxes. Discouraged, she mentioned her concerns to a friend who suggested that she seek a second opinion diagnosis of her circumstances by a qualified tax planning advisor. She did this and was delighted to discover that her financial condition was far different that what her CPA had thought:

1. Rather than paying $200,000 in taxes when she sold her properties, she would pay no taxes at all.

2. Her income would significantly increase above what she was receiving by owning the properties.

3. Instead of paying excessive income taxes, she would receive an immediate refund of taxes that she unknowingly overpaid; and,

4. She discovered other tax-saving opportunities that she could take advantage of about which her CPA was unfamiliar.

How could her CPA be so wrong? As is true of many accountants, he was never trained in the discipline of tax planning. In fact, according to CPAs with whom I have spoken, candidates for the Certified Public Accountant designation are not required to take tax planning courses to earn this title–and most do not bother doing so. Consequently, although they can become very skilled in identifying tax problems, few of these professionals acquire the experience and know how to solve them. They can be viewed as being “financial historians” who take what a client has done after-the-fact, filter that information through the required tax codes and generate, hopefully, an accurate tax return. This is great accounting but it is not tax planning. You are always better served when you meld together the advice of a trained tax planning professional with that of your CPA or accountant.

If you want to find the most appropriate resolution to your tax concerns, it is essential that you first learn what your true tax problem is and then search out the most viable options available to eliminate, defer or reduce the taxes for the year of sale. After you identify potential solutions and understand how each can be tailored to your specific circumstances to meet your objectives, the last step before implementation is to validate them under tax law through independent tax and legal authority. Following this approach will prepare you to be better informed on how best to approach the sale of your property and maximize your profit and income at close of escrow. Once this is done, you can confidently move forward to sell and then enjoy the benefits of the plan you implemented.

Finding effective tax remedies can be more easily achieved by following the advice of an experienced tax planning specialist who will guide you through a simple step-by-step process that works. Your tax-planning advisor facilitates the tax solutions; tax attorneys and your CPA or accountant jointly validate the solution you choose and its structure; and your real estate professional guides the sale of the property. It is a synergistic team effort that is focused on benefiting you in the most effective ways possible.

Whatever the new tax laws might be, we all should prepare ourselves to take full advantage of them. How? By plotting out a common-sense approach to tax planning through which we can:

1. Gain the foresight needed to confidently pay less in personal income taxes; and,

2. Significantly reduce, defer or eliminate the capital gains, depreciation recapture and other potential taxes you would otherwise be obligated to pay when you sell your appreciated real estate or other assets.

Here is the Good News

Taxes can dramatically cut away at any chance for you to successfully meet your financial goals and objectives. It makes no difference how old you are, if you are working or now retired. If you earn enough money or want to sell appreciated assets such as real estate, you will probably be obligated to pay taxes. The good news is you have choices.

We have all learned from childhood that it is prudent to get a second opinion if we are diagnosed with a serious illness. Wouldn’t you agree that paying more in taxes than you are legally required is a serious threat to your financial health? If you have appreciated real estate or other assets that you would like to sell but are concerned about paying taxes, doesn’t it make sense for you to learn what options are available to you to solve them? If you do, you will find out that you, too, have choices that can help achieve your dreams in spite of a wavering economy and changing tax law.

Maine State Income Taxes – Get To Know & Make The Difference!

Taxes are an inevitable fact of life. Where ever you may reside paying taxes is indispensable for each and every earning individual! This justifies clearly that most of the individuals do not mind paying taxes of any sort! After all it’s us who get the benefits of these taxes in return in form of the infrastructures and civic amenities in the country!

Especially, Maine state income taxes seem the easiest of all!

Many a times when people migrate to the Maine, the state income taxes seem to be lost. You often stop worrying about them. To be precisely honest, almost all of us forget about the taxes all round the year and click on to them as emergencies close to the due dates!

Here are a few important factors determining and defining the Maine state income taxes:

1. Due date

Due Date – that’s an interesting and real alarming term. As paying taxes is indispensable until & unless you are unemployed, people often miss out the due date! And to avoid the fines it is almost unquestionable to file the taxes before the due date.

Well, this year you won’t miss it – mark it on the calendar in your room right away – for Maine state income taxes the due date is April 15.

2. What is your bracket?

Knowing your bracket is quite essential to identify as to what sort of income tax payee are you?

In order to know your bracket you primarily need to evaluate the amount of taxes you need to pay. Main state income taxes highly depend on these brackets.

The Maine state income taxes are divided into 4 key brackets.

Another factor defining these brackets is your marital status – that is, it is different for those who are single and those who are married.

As per your income levels, the brackets define the percentage of taxes that you need to file.

i. For the singles, the 4 brackets are as follows:

– 2% for first $ 4,450 income.
– 4.5% for income between $ 4,451 – $ 9,100.
– 7% for income between $ 9,101 – $ 18,250.
– 8.5% for income $ 18,251 and above.

ii. For married couples the 4 brackets are as follows:
– 2% for the first $ 9,150 income.
– 4.5% for income between $ 9,151 – $ 18,250.
– 7% for income between $ 18,251 – $ 36,550.
– 8% for income $ 36,551 and above.

3. Understand the forms you need to fill in.

Filing the taxes of course requires filling the forms. There are forms specific for all sorts of taxes. The best way of understanding the forms and knowing which one you ought to fill in is approaching the professionals. They would not only guide you the right way of filling the forms, but also help you smoothly go through the process.

Those planning an economical fining of taxes and hence doing it themselves, read through the following tips:

i. 1040-ME
1014-ME is the most common form you would be required to fill in. It is quite a long a detailed form.
ii. 1040S-ME
1040S-ME is almost a shorter version of 1014-ME.
iii. Determinants for the form
What you do all round the year to gain income determines the sort of form you would need to fill in. Those who are self employed need to fill in various other forms.

Hence, moving to Maine, you have nothing to worry about in the taxes.

State income tax system is quite similar to its Maine counterpart, except for the amounts!

Tax Saving Strategies For Real Estate Investors

Business Entity

The 1st step in doing any real estate investments is to start a business. There are different types of business entities: sole proprietorship, Limited Liability Company (LLC), Series LLC (only in certain states), Limited Liability Partnership (LLP), LLLP, S-Corp, C-Corp. Each of them has its advantages and disadvantages. The only true flow through taxation entity and the most beneficial in terms of holding real estate is Limited Liability Company. Limited Liability Company allows you to pay for business related expenses with pre-tax dollars. It is very important to understand that when you get paid and receive your paycheck, your taxes are already deducted and all your expenses whether they are real estate or business related are deducted on AFTER-TAX basis. When you have an LLC, you take all business expenses, deduct them, and pay income tax on what is left over. LLC is the only entity that is NOT subject to loss limitation! LLC does not require records and minutes of meetings. Filing paperwork is limited to articles of organization that lists LLC members. Tax Advantages: LLC is a pass through entity and if it is a single member the entity is considered disregarded by IRS. A corporation is subject to double taxation where not only the profits are taxes but also distribution in the form of dividends are taxed as well. The other advantage is flexibility in terms of LLC ownership transfer. LLC ownership is guided by Operating Agreement, which is an internal document. In order to change ownership all that needs to be done is the Operating Agreement and no filings are required besides updates with IRS for given tax ID number.It also has less filings than an S-Corp and very easy to maintain. If you have multiple properties, have them each in LLC and have one LLC to be your holding company that would own all the other LLCs. For tax purposes your main holding LLC will be a sole member LLC for the other ones and you will need to file only one tax return. In addition to the tax benefits LLC also allows you to have a basic level of asset protection.

If your business owns the assets, they are separated from your personal assets and in case of a law suit they can not be touched. Please, note that LLC is a BASIC level of asset protection and if the opposing party has a good attorney there are many ways how your personal assets can become a part of a law suit. It is called piercing corporate veil. For example, you are required to have a separate bank account for an LLC. If your LLC owns your property, then all property relates income and expenses have to come out of that particular bank account. If this is not done, the LLC status can be disqualified and your personal assets become part of the lawsuit. Your LLC must be in good standing with the state and your must have adequate information on your article of organization. The purpose of the business must be clearly stated with no exclusions and you must file amendments when necessary. If you buy real estate, you should say that you buy, hold, rent or lease residential real estate; if you sell, you must state that you buy for the purpose of resale for profit, etc. In some states it is necessary to publish LLC in a local newspaper, and it can get very expensive; in other states like Maryland you need to pay annual fee, which is currently $300 a year. You need to check on your state requirements and guidelines and always be in good standing with the state.

*RENT DEDUCTION* on your primary Residence. If you have an LLC, you might need an office and conveniently enough it could be in your personal residence. According to IRS Code 288G, you are allowed to deduct rent payments for your office space in your personal residence.

*Depreciation*. It is the most beneficial deduction in real estate! While your real estate is appreciating, you are allowed to depreciate it over the life of the building, which is 27.5 years and take the deduction against your income. However, depreciation is allowed only against the building, land can not be depreciated. For example, if you own a house that’s worth 100,000, the value of the building might be only $80,000 and the value of the land is $20,000. Thus, you are allowed to take depreciation expense against the value of the building only.

*Accelerated Depreciation*. You might have heard from your accountant that accelerated depreciation is not allowed against real estate, and it is true, but there is a way to make improvements deducted in prior years and it all depends on how they are classified. For example land improvements such as curbs, sidewalk, and landscaping are depreciated over 15 years; personal property is depreciated over 5 years. Items that are considered personal property according to IRS code 1.48-1(c) must have one of the following features 1. accessory 2. function 3. movability. Basically everything that is an accessory, functions or movable is real property. If you are doing a rehab and can install movable walls, you can deduct the cost of improvements over 5 years. If they are not movable, then you will have to take 5-6 times less deduction for improvements in the next 5 years. Make everything you can either function, be an accessory or make it movable! One commercial developer built his office building with light weight movable walls and was able to deduct $80,000 that same year.

*DEALER* status. When flipping properties it is important to avoid “DEALER” status. In some case it can be avoided by flipping properties through different entities, in some cases by doing a few transactions, but the easiest “investor friendly” way is to simply state your INVESTMENT INTENT. If you state that your investment intent is buy, hold, lease, and rent properties unless forced to sell under certain conditions like need for working capital, you can get away with not being considered a DEALER.

*IRS Red Flags*. There are also certain things you should not do that would raise red flags to IRS and you might get audited. First, do not report too much rental income loss, there are plenty of expenses you can find to reduce your pre-tax income. Second, do not over complicate your asset protection structure. Having too many business entities on top of each other, or having domicile headquarters in Las Vegas, NV, tax free state could be a red flag. Reporting losses for more than 2 years always raises red flags. The common sense behind it: “if you do not make money why are you still doing business?”. Reporting excessive donations, high expenses vs high income can also cause an audit.

*Property Taxes*. Real Estate Investors are subject to a number of taxes including property taxes. Assessed value and market value of the property always have a gap. In 2007 assessed value was normally lower and in 2010 it is 99% of the time higher than market value of real estate. The taxes are not always reassessed depending on the market cycle and it is your responsibility to dispute them. In state of Maryland it is allowed to dispute personal property taxes within 60 days off settlement date or file before the end of the year for the next year hearing. Even though taxes are a deduction against income, they are not a tax credit, and the more you can minimize your expenses the more profit you will end up with. In order to successfully dispute your tax bill you would need to show the comparables and recent sales prices of real estate in your area. You will also need to compare the real estate that was recently sold to your property in terms of structure, number of bedrooms, bathrooms, square footage, amenities, etc.

*Capital Gains Taxes*. This type of tax is imposed only when you sell the property. The difference between purchase price and sales price is subject to this tax. There are exemptions to homeowners who lived in the property for at least 2 years and the amount of profit. There is a way to defer capital gains taxes by doing a 1031 Exchange. Make sure that you contact an escrow company and do everything within IRS guidelines. According to this IRS rule you can sell your property, find another property, make an offer within 45 days and settle on a new property within 6 month and defer paying capital gains taxes. According to the IRS tax rules, the property you are buying must be “likewise” property, meaning it does not matter if it is bigger as long as it is “investment” just like the one you just sold. So you can buy a single family house and buy an apartment building as long as both were investment properties.

The information provided in this article is just a general overview and not a legal advice on general real estate tax laws. This information might be different or not applicable depending on your state, tax bracket, and/or other restrictions imposed by IRS. Please, consult with your accountant in your local area.