The Real Estate Investor’s Guide to Year-end Planning

Written on November 20, 2015 by , updated on September 12, 2017

Year-end PlanningThere is nothing worse than scrambling in April to find receipts and figure out if your company owes taxes or not.

If you have an LLC or S-Corp, this is worse because you have to figure out how much profit your company made and the implications for your personal tax liability.

The time to prepare for 2015 taxes is NOT in February or March – it is now!

It’s worth mentioning that I am not a CPA or a lawyer. However, as an experienced financial analyst, I have reviewed thousands of tax-returns.

There is no coincidence that highly profitable customers also choose to use highly qualified CPAs. I whole-heartedly believe that you cannot grasp the true profit of your company if you do not have a good accountant that can steer you in the right direction.

Related: Top 15 Tax Deductions for Landlords

Without further ado, let’s discuss the nine main items you need to have figured out before December 31.

Year-end Planning for Investors

1. Property Taxes

It’s very important that you only deduct property taxes as an expense – if you actually paid them to a taxing authority. Some landlords get behind on their property taxes but still want to deduct them, even though they did not make tax payments.

Related:

2. Repairs

Repairs and supplies needed for repairs and upkeep are deductible. Additionally, you need to issue 1099s if you made payments to an individual rather than a company.

Source: Instructions for 1099-MISC (IRS)

3. Interest

A lot of real estate investors use “private money” or loans from individuals. If this is the case, you need to issue a IRS Form 1099 to reflect the interest paid.

Source: Am I Required to File a Form 1099 or Other Information Return? (IRS)

4. Personal Taxes

I’m not sure about you but I hate surprises. Well, I hate tax surprises to be more specific. Sure, a refund check is nice, but all that really means is you made a mistake and overpaid in the first place. Getting hit with a large tax bill is not fun and inevitably comes when you don’t have much cash around.

Below is an updated personal tax bracket for 2015. Check to see how much in taxes you have already paid-in.

tax-chart

5. Debt Implications

This is going to get confusing fast (remember that time I told you to hire a good real estate CPA?) so stick with me.

First, I’ll tackle an easy issue that comes with debt. Let’s say you own a property worth $100,000 free and clear. You need some cash so you take a line of credit out against the property for $50,000. You don’t have to pay taxes on the $50,000 even though now can have $50,000 in your bank account.

Of-course you have to pay interest on that money, but that interest could be tax-deductible!

Now let’s get to the confusing part.

Let’s say you made $10,000 worth of payments to your bank. Of that, $8,000 was for principal and $2,000 was for interest. Even though you had $10,000 worth of expenses the principal portion of the payment is not tax-deductible.

Professional Tip: While Your CPA is doing all of this work, have them make you a balance sheet for your company. This is good for you to know and will be very beneficial the next time you apply for a loan. Hopefully, your equity is increasing every year.

6. Insurance

Insurance is almost as exciting as taxes. However, even though it’s not exciting this time of year is the perfect time to review your policy. Does the policy properly reflect the value of the property including all of the updates?

Have you added a separate business that needs to be covered under a separate policy? While your reviewing your policy and the expenses, be sure to check out competing insurance companies to see what kind of value they can provide as well.

My buddy, Lucas carries an Umbrella Policy that covers his personal assets as well as his rental properties.

7. Software

This year I made a big push to try an move my entire business online. One major step I made was signing-up for Cozy, a free property management software. I also use Evernote pretty extensively as well.

8. Mileage

If there is one thing you don’t want to be doing in March of 2015, it’s figuring out when and where you made business trips to between properties. Take some dedicated time and make an organized table for mileage. The current standard mileage rate from the IRS website is 57.5 cents per mile.

Source: Standard Milage Rates (IRS)

9. Growth

I saved the best for last. This article isn’t just about taxes, but about proper recordkeeping. Documenting what worked and what didn’t in the previous year. Ask yourself the following questions

  1. That said, what are your plans for next year?
  2. What resources will you need to achieve your goals for 2016?

Goals without action are just dreams.

I hear a lot of people say things like: I want 10 paid-off rentals.

How many do you have now? Most of the time these people don’t have any rental property.

Map out a plan to get to your ultimate goal. Additionally, make this yearly goal realistic. Of-course if you had $1,000,000 in cash it wouldn’t be that hard to get 10 paid-off rentals. But if you only have $100 it might be an unrealistic goal for the year.

One thing that has helped me dramatically is focus.

I own multiple businesses and have a full-time day job and a growing family with an AMAZING wife :)

To be effective with my goals, I have to focus on one thing at a time. Additionally, I have found it very helpful to set a yearly goal, then break it down into quarterly goals. Sometimes, I even break this down to monthly goals. This helps me be realistic with my time and what monetary resources I need to allocate to certain projects.

Conclusion

I once had a multimillionaire boss who would commonly say: Nobody ever went broke paying taxes.

It’s a positive spin on a topic everyone loves to complain about. The bottom-line: Taxes are a reality and you need to plan accordingly.

 

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