Avoid Real Estate Investment Tax

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Minimization of Individual Tax Liability in Real Estate Investment In the world of investing, in general, one question is often the most challenging to answer. How does an investor grow their nest egg without losing the majority of their gain to the IRS as income tax? This question is even more challenging in the area of real estate where one’s tax liability is drastically increased by just the sale of one property. This simple transaction can increasing the investor’s ordinary income if the property is a short term investment (investment is less than 1 year) or increasing their capital gains for long term investments (over 1 year). Surprisingly, there are several easy ways to drastically reduce tax liabilities with some planning and…show more content…
In this case the custodian withdraws its fiduciary responsibility and allows you to choose the investments that you think are appropriate, such as investment property. (Casey 2013, 168) At first glance the self-directed IRA can seem like the perfect way to leave the stressful world of the stock market but the seemly endless rules can quickly change an invertors mind. Furthermore if an investor knowingly or unknowingly breaks one of the many rules they could be audited by the IRS and if caught the entire IRA becomes immediately taxable as ordinary income. The most important rule is that the investor must keep his personal funds separate from their IRA funds. Most professionals agree it is important to consult an attorney and a CPA to facilitate the creation of a self-directed IRA. For the investors who fell the risk of an IRS audit is too great and are looking for more protection of their other assets, if they find themselves involved in a lawsuit, the formation of a Limited Liability Company (LLC) might be a better option. The existence of LLC’s didn’t occur until 1977 as author John Balouziyeh explains here: Corporations and partnerships have traditionally served as the forms of organization from which business owners could choose. Recently, state statutes have begun to recognize a new form of business organization, the limited liability company (LLC). First recognized by state statute in 1977, the LLC is a hybrid
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