Do You Save More In Taxes With Long Term or Short Term Deals?

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In this video, I’m going to tell you about some of the ways you, as an active investor, can use appreciation, depreciation and other techniques to save on taxes.
 
Joe: We’re still talking about exit strategies while analyzing deals. When you analyze a deal and try to figure out which one makes the most sense, you need to look at the exit strategies and how you’re going to unload that property and make money on that property. What we’re going to talk about today are the tax implications.
 
Joe: If it’s a long term investment, you’re going to have depreciation on that property, if you’re not an active investor, it’s going to be depreciation on the passive investment and there are limits on how much you can take. So you almost always want to be able to be labeled by the IRS as an active investor. Talk to your CPA when you’re doing that to make sure that they label you that way. Most CPA’s don’t understand rental properties so you’re going to have to do a little bit of research on your own, or talk to me in order to learn how to structure these things.
 
Joe: I’m not a CPA and I don’t give CPA advice but I can give you general broad ideas, and I can show you the stuff that I’m doing, because believe me, I’m taking as many deductions as I can that are legitimate. I take my depreciation on all of the rental properties and all of the long term investment properties that I own – I take them as active investments so that it reduces my active income, my salary that I bring in and makes my annual tax hit much, much lower because I own so much property. And if you use the techniques that I’ve been teaching, the zero down techniques especially, you can amass a lot of property and have a lot of properties in your portfolio without having to use any cash and have all of this depreciation every year, reducing your tax bill to next to nothing. So that’s a really important part of long term investment exit strategies.
 
Joe: The other is appreciation. Lately we’ve seen depreciation in the values of the property, which is not good, but over the long term, you’re going to see appreciation in the value of the property. And to think that it’s going to go up 2%-4% per year annually in most parts of the country, even if you advertise it in places like California. If you take the really low down and the really high up times and then you even them out over the year, you’re going to see probably an appreciation of 3% or 4% on long term investment property (which is a good place to be).
 
Joe: If you happen to try to sell the property when you’re at the bottom of the cycle, maybe you’re not going to get that kind of return. But if you’re keeping a property for 10 to 40 years or more, which is probably what you should be doing if you’re doing long term investments, and you say, ‘I’m 70 years old. I don’t want to keep a property for 40 years. I want to get in there and get out.’ Well, I would just keep it until you die. As long as it’s creating an income for you, keep it until you die and then give it to your kids.
 
Joe: You don’t know how long you’re going to live these days. You may live another 30 or 50 years. Technology’s getting better and better and better – I plan on living to be 250 years old. I figure, if I can just get to 100 then they can probably get me another 20 years just by patching me up on the technology they create, and then if I can just get that 20 years, then maybe they can get me to 200 just by getting me some more technology. Then if they can get me to 200, I can probably get myself a brand new body after that. So I plan on living a long time and keeping these long term investments to get me through that process.
 
Joe: The other thing is the buy down on the loan with long term investments. If you’re buying these properties subject to the existing loan or if you’re buying them with the zero down structure, they all have loans on those properties and most of those loans, when you buy Subject-To you, you should get one that has an advertised loan.
 
Joe: Don’t get one that’s just interest only unless you plan on paying it down every month. But when you pay down on a $150,000 property, you’re probably going to pay down $150 or $200 a month towards that property. So every month, you just made 150 bucks on that property, just from the buy down on the loan.
 
Joe: Hopefully you made some money on the appreciation on the property, hopefully you made some money on the depreciation by the tax benefit on the deal and hopefully you made some cash flow because your rents keep going up every year. So there’s lots of wonderful ways to make money on long term investments.
 
Joe: Just make sure that when you analyze a deal, that you see where that money’s coming from, how much it’s going to be, and whether or not it’s going to make sense for either you to hold onto that property or for an investor who takes that property over. Again, if you’re in a position to be able to buy that property and maintain it and hold onto it for the long term, does it make sense to you? If it does, and it probably would make sense to someone else to sell it to them and make a chunk of money right then and there, and then do it as a short term investment for yourself and as a long term investment for them.
 
Joe: The other type is the short term. If you’re selling a property short term, you need to look at your exit strategy and that’s going to require looking at things like capital gains taxes – if you make a chunk of money, you have to pay taxes on that money (unless the money happens to be in a Roth IRA where you can put the money right back into the Roth). But if you’re taking that money out to live on or run your business on, there’s going to be taxes on it and so having these passive investments on your portfolio will help offset the income that you make from your short term investments.
 
Joe: When you look at these exit strategies and you think about short term exit strategies, how much money can you make right now? And how much are you going to have to pay in taxes and how are you going to use that to offset your costs? You can also deduct all of the other costs that you have in that transaction to make that work.
 
Joe: So when you’re analyzing deals, you need to take those things into account. And we’re going to talk about some of these things when I get into analyzing specific deals which we’re going to do in the last 8 or 10 videos in this series. I hope that helps. Thanks.