irs' best kept secrets for real estate investors

Income tax liability is derived by multiplying taxable income by the applicable tax bracket rate. The lower the

taxable income, the lower the rate, thus the lower the tax liability. Herein lies the secret to significant tax savings. The goal for tax planning is to reduce taxable income.

That's the primary goal of all tax planning. Let's find out how this is accomplished.

WAYS TO LOWER TAXABLE INCOME:

1. Spread income over time

2. Spread income to various entities

3. Group income and expenses

Knowing something about each of these concepts will permit you to intelligently implement a sound tax

program. With the assistance of a competent tax advisor, your tax savings will be significant.

Spreading Income Over Time

Real estate, especially mid-sized apartment buildings, provides the opportunity to spread income over several

years using the installment sales method of reporting. By accepting a relatively low down payment and spreading the principal payments over several years, total taxable

income for any one year is reduced.

In the tax-deferred exchange method, income can also be spread over time. Both methods can be structured to give

you maximum reporting flexibility.

Spreading Real Estate Income to Various Entities

Spreading income to various entities reduces the income any one entity has to report. By transferring ownership of

assets to corporations, partnerships, relatives, or trusts, an effective transfer of income can be accomplished as well.

Relatives in low-income brackets can be paid for services provided. As long as these services represent legitimate business transactions, spreading income in this manner

can save you thousands of tax dollars.

When operating entities have dissimilar tax reporting years and basis (cash or accrual), it's possible to spread

income and expenses over different years to take advantage of the tax laws.

Grouping Real Estate Income and Expenses

Grouping income and expenses can lower taxable income. Real estate provides the flexibility to implement this kind of tax planning tactic. Apartment building investments are a good example because they fit well within the definition of active participation rules (which allow a $25,000 write-off against salaries and other active income). This write-off

alone represents a substantial tax savings to many individual investors.

When changes in either income or expenses can be projected, the benefits of grouping are phenomenal. For

example, refinancing will create a higher interest expense deduction to offset anticipated increases in rental income. Short-term loan contracts with high points will accomplish

the same thing.

If expenses are projected to increase, offset them by increasing receipts from installment contracts. Avoid

reporting income when notes become due by renegotiating an extension of time. If the senior mortgage matures before your note, subordinate it to new financing

to extend the due date.

Investing in midsize apartments gives you the advantage of acquiring properties outside your hometown. As a

result, travel and transportation expenses related to your investments can be deducted. These deductions should be

timed to give you the maximum tax savings using the "grouping method." By rearranging the selling price and interest rate (within certain limitations), it is possible to

create either higher or lower interest and/or depreciation expense deductions.

Residential income capital gains and losses can also be grouped to maximum tax benefits. With restrictions, capital losses may be used to offset capital gains plus

additional amounts of ordinary income.

These represent only a few of the many techniques available. Always consult your tax advisor to assist you in making these moves. Understanding these concepts may

save you time and money.

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