QOTW: What are your best (and legal) tax saving strategies?

63 Replies


Since it's almost the end of the year, I wanted to focus our question on ideas and strategies that can help us make last minute changes to help lessen the tax burden, or to start the year with best practices.

Let's help our community with our best legally allowed options to save on taxes. Please make sure to note if it is specific to a state, asset class, or other specifics.

Want a quick list from one of our resident experts? @Ali Boone wrote a fantastic blog you can find here: https://www.biggerpockets.com/...

Here is a couple things we do:

1. Make sure all bills are received and paid in December. If you have vendors that slow bill, call them and let them know you need them by the end of the month. Some vendors intentionally mail bills late, so you can't pay them in December, so they don't have the income on their taxes. Tell these vendors you will mail the check on December 31st, so you get the 2021 expense and they get the income delayed to 2022.

2. Look for things that may need an upgrade. I purchased a new computer this month, supplies for our short term rental and some tools. Anything you will legitimately need in the next few months, it is better to purchase now and get the 2021 deduction.

3. Consider selling investments that you may be able to take a loss on. For example, maybe you have capital gains from a stock sale and you are holding a dog stock that lost money. Sell the dog and get some tax benefit. 

4. We are preparing our tax records to pass off to our accountant. Getting everything gathered together and ready before January allows us to get everything to our CPA early and our taxes are done ahead of others. 

5. One other final end of year detail is getting ready to send 1099 to any non-incorporated vendor who did over $600 of work in 2021. This doesn't reduce our tax burden today, but can prevent problems in the future. 

6. We shred old tax documents and receipts as they have reached their holding period of 3 - 7 years. Talk to your tax professional about how long to hold things. Keep in mind, holding documents longer than required can create problems by raising additional questions in an audit. (Some documents need to held indefinitely such as mortgage contracts and depreciation tables, etc.)

7. The final step for us is getting ready for 2022. We are looking at any tweaks to our process to make things easier to track. We are getting templates and file folders ready for the new year. 

High end vehicle that you can take section 179 on..  Airplane same thing section 179 Ala Grant Cardone
heavy equipment  you say you need a back hoe or excavator  no money down zero interest roll it right off the lot
deduct almost 100% of purchase price and start your little excavation company.
Promotion
Azibo
Smart landlords use Azibo
One-stop-shop for landlords
Rent collection, banking, bill pay & access to competitive loans and insurance - free for landlords
Get started for free
Jay I love this way of thinking, growth while saving taxes. 

Originally posted by @Jay Hinrichs :
High end vehicle that you can take section 179 on..  Airplane same thing section 179 Ala Grant Cardone
heavy equipment  you say you need a back hoe or excavator  no money down zero interest roll it right off the lot
deduct almost 100% of purchase price and start your little excavation company.

Open and contribute to a Solo 401k for 2021. The individual limits are $58,000 and $64,500 for over age 50. If married , your spouse can also contribute to his/her account an additional $58,000. ( $64,500 over 50). 
Yes, your Solo 401k can own RE.

Originally posted by @Alicia Marks:


Since it's almost the end of the year, I wanted to focus our question on ideas and strategies that can help us make last minute changes to help lessen the tax burden, or to start the year with best practices.

Let's help our community with our best legally allowed options to save on taxes. Please make sure to note if it is specific to a state, asset class, or other specifics.

Want a quick list from one of our resident experts? @Ali Boone wrote a fantastic blog you can find here: https://www.biggerpockets.com/...

Thanks so much for the shout out! :)

And don't forget to roll ove some of your 401k or IRA into a Roth IRA! Guess which way Taxes are headed in the future!!

Get it over now and save on future taxes on it and ALL the Money it is going to make in the furure!

Thanks for those kind words @Michael E..  I love the 1031 and have used it extensively for myself over the years.  But in my mind it's only second best :)

In my mind  the absolute best tax saving strategy available anywhere is the ability to live in a property sell it and take the profit tax free under sec 121 - the primary residence exemption.

And being able to combine sec 121 and sec 1031 with small multifamily properties of 4 or fewer units and using favorable primary financing is like throwing gasoline on a fire!!!

Just sold a rental, and about to sink the majority of proceeds into syndications. Been working with my cpa on tax planning, and the bonus depreciation, in addition to all of the other deductions given by syndications, will make a huge difference in my tax exposure on this sale. In future, assuming the 1031 sticks around (I tend to believe it will), our plan is to roll over from one syndication deal into the next, via 1031. 

@Ali Boone Enjoyed the 20 points you make. However, I don't believe the Property Tax deductions (Point 2.) on a Rental is restricted by the 2018 Tax Cuts and Jobs Act (TCJA).

Specifically Section 212 says:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year:
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.

@Elizabeth M Williams Just curious is it possible to do a 1031 exchange on a syndication if you are a LP investor? For ex: If i invest 100k into a RE Multifamily Syndication as a LP , i am technically only owning shares of the LLC partnership and will get Yearly K1's > Then if the GP sells the asset say after 5 years , and turns my money to 150k , would i be able to roll over the 50k using 1031 exchange into another Multifamily syndication? I always assumed that you can only do a 1031 exchange in syndications if you have 'Tenancy in Common' (or) if you have an LLC with exact same set of partners in every syndication you invest.?

Promotion
BiggerPockets
The one-stop-shop for REI
Find Local Home Improvement Pros!
Check out our network of trusted, local contractors for all of your home improvement projects.
Find a Contractor

@Alicia Marks, sorry to hijack the thread a little but there's some potentially dangerous information out here that will confuse some folks.  @Venu Vedre, You're just about right. You cannot do a 1031 exchange from a real estate asset into a membership interest in an entity that owns real estate. Except for the vehicle of a delaware statutory trust (which are not normally thought of as syndications) you must be a tenant in common with the LP or LLC that is doing the syndication. @Elizabeth M Williams please shed more light on the type of investment you are using that can accept 1031 dollars but not give the exchanger a tic interest in the real estate?

However, on the back side of things, the syndication can always do it's on 1031 when it sells.  And this may be what Elizabeth is referring to.  Once you have invested in an LP the LP as a whole can do 1031s.  And the membership composition of the LP does not matter.  Because it is the LP itself that is exchanging and not the individual members.

So bringing this back to Alicia's question - I think for serial syndicators having a business model where they raise money, buy, stabilize, operate and then sell a syndicated asset with a 1031 is an incredibly powerful tool for the syndicator.  Because the bulk of the members can stay with the syndication paying no tax and eliminating the need to fund raise every time!  Your investors go with you.  And if one or two want out, the syndication can simply buy them out of their interest.  And over time as the lP buys out the interests of investors who don't want to go forward, the shares become more concentrated.  And the syndicator moves closer and closer to doing their syndications on their own.

@Dave Foster yes you are right. I have worked with my CPA to do as much as I can to mitigate capital gains taxes from the sale of one of our investment properties, because, after ton of 'spreadsheeting' various scenarios, even with a minor tax hit (ie not being able to/not wanting to use 1031 exchange from my house sale to roll into a TIC/DST/other 'like' asset) our capital will still outperform returns I would have had if just leaving it in this rental. Leverage is a beautiful thing in real estate, and I want to put that money to work for us even more than it has been. So to echo what you said, I'm referring to the ability to 1031 from one syndication into the next, with the same operator. As you likely already know, it's pretty much impossible to find a DST that outperforms, if even matches, the returns of syndications (have done a lot of projections with those, too), and they are expensive, rarely offer value add opportunities, and have a long hold period. They operate more like a bond proxy, not at all on par with what most MF investor are looking for, in terms of wealth-building.

It again underscores the need to partner with operators who have gone through a few cycles, offer conservative projections (better to under promise and over deliver), and whose objectives align with those of their investor base.

Originally posted by @Dave Foster:

Thanks for those kind words @Michael E..  I love the 1031 and have used it extensively for myself over the years.  But in my mind it's only second best :)

In my mind  the absolute best tax saving strategy available anywhere is the ability to live in a property sell it and take the profit tax free under sec 121 - the primary residence exemption.

And being able to combine sec 121 and sec 1031 with small multifamily properties of 4 or fewer units and using favorable primary financing is like throwing gasoline on a fire!!!

I had not heard this strategy until a few weeks ago when we had a 1031 discussion. My mind was blown! I'm in my current live and flip that I'm planning to rent out, but timing the sale after a few years will help this single lady double down!

Originally posted by @Todd Goedeke:

Open and contribute to a Solo 401k for 2021. The individual limits are $58,000 and $64,500 for over age 50. If married , your spouse can also contribute to his/her account an additional $58,000. ( $64,500 over 50). 
Yes, your Solo 401k can own RE.

Hey Todd, can you make contributions to a Solo and Roth IRA at the same time or were you speaking of the same thing?

Originally posted by @Todd Goedeke:

Open and contribute to a Solo 401k for 2021. The individual limits are $58,000 and $64,500 for over age 50. If married , your spouse can also contribute to his/her account an additional $58,000. ( $64,500 over 50). 
Yes, your Solo 401k can own RE.

My understanding is that you can only contribute earned non-passive income as the employee but you as the employer can contribute a share of the company profits.

Once the funds are in the Solo401k you can own real estate in the name of Solo401k but you can not do any work yourself e.g. property management or repairs 

Originally posted by @David Arsene:

My understanding is that you can only contribute earned non-passive income as the employee but you as the employer can contribute a share of the company profits.

Once the funds are in the Solo401k you can own real estate in the name of Solo401k but you can not do any work yourself e.g. property management or repairs 

 Whether you make employee or employer contributions to a Solo 401k, the limits are based on your earned income and not the company profits. The term "profit sharing" will often confuse people on this. 

Originally posted by @Pat L.:

@Ali Boone Enjoyed the 20 points you make. However, I don't believe the Property Tax deductions (Point 2.) on a Rental is restricted by the 2018 Tax Cuts and Jobs Act (TCJA).

Specifically Section 212 says:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year:
(1) for the production or collection of income;
(2) for the management, conservation, or maintenance of property held for the production of income; or
(3) in connection with the determination, collection, or refund of any tax.

I wrote the article in 2017 ;)

Alicia,

Thanks for your wonderful attention.

I have a brief contribution to the "Tax Saving Strategies."

Year End Business Tax Strategy #3: You bet your assets. There’s no sign that this goody is going to change, but you should know that 100% first-year bonus depreciation is available for qualified new and used property acquired and placed in service in calendar 2021 (think punch press or track hoe). You might be able to write off the entire cost of assets that you add this year. Regarding vehicles, passenger cars that your company puts into service in 2021 have limited deductibility, but SUVs, pickups, and vans don’t. What a deal.

Or is it? This brings us to a key concept of tax planning. Examine tax breaks for whether they’ll continue: Will they be around next year? Will your tax rate be higher in 2022? You may want to wait and get the break then to lower your 2022 taxable income.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you