"..Nobody owes any public duty to pay more than the law demands.” Judge Billings Learned Hand
Buying houses is fun and profitable, no doubt about it. I had a pretty good August, but I think we need to step outside of the house buying business for at least one post and focus on our dealings with the good old government. They are a part of every deal you do and August is tax time for me. My corp fiscal year is coming to a close at the end of the month. I run a California C Corp. No secret reason or strategy why. I'm not sure if it is any better than any other entity. I actually took a class with Dyches Boddiford that spent 3 days explaining and comparing trusts, LLCs, S and C corps. Ultimately, I just went with what other more successful investors were using and it seems to have worked out well.
Now, back to my taxes. About 6 weeks before the end of my fiscal year, I always, ALWAYS send an accountant's copy of my books to my CPA and ask what my current tax situation looks like and if there are any strategies I can do to minimize my tax burden. This is your duty! You must do this every year and do all that you can, LEGALLY, to reduce the unnecessary taxes you might otherwise unnecissarily pay.
My CPA replied that I could pay myself more and I should prepay anything coming due later on. Like I said, we're not talking laundering money or stuffing cash under a mattress type stuff here. An old man once told me, "If you're going to be in business and do things legitimate, then do them 100% legitimate or don't bother doing it at all." That is really good advice.
Here are the simple steps I took to reduce my taxes by enough that with the money saved, I would have significant capital as a down payment on another house.
1. Prepay any mortgage payments. There is no reason why you can't pay a few month's worth of payments in advance. Especially interest only payments to private lenders. This doesn't sound like much when you have just a few properties, but if you're making 5 or 6 figures in payments every month, prepaying 2 months worth of payments can make a big difference.
2. Stock up on office consumables. I buy a lot of stamps. I buy so many, the ladies at the post office know me personally and always save sheets of the good ones just for me. If you're going to spend a few thousand on postage over the next few months, weeks, days, just load up on those consumables today.
3. Make any large purchases now instead of later. Office furniture, computers, electronics, vehicle work (you know you need those new tires and brakes!), appliances for your rentals (buy them on sale and put them in storage), water heater, rehab work or any other rental upgrades.
These are just super basic things you can do to minimize your tax hit. Implementing all of them saved me from a significant tax burden. What other strategies do you use? Please leave any comments below, share this post with others and head over to my blog for more insights on investing in real estate.