April 18th was a tough day this year…. After going thru my first full tax year being in the land business in 2016 I learned a lot and thought I would share my thoughts and tips. First of all, I have been investing in rental properties for about 10 years, So I am pretty familiar with tax code, deductions, etc. and do my own taxes every year. So with rental property investing I was used to showing very little profit on paper at the end of the year due to depreciation and other deductions that would lower my tax liability. On the other hand, with land you have very little tax shelter for your profits, other than actual expenses incurred, and to make matters worse you pay self employment tax (15.3%) on your profits, which you do not on rental property profits as they are considered a passive investment, not earned income.
The land business is awesome and you can make a lot of money, you just need to plan for your tax liabilities on what you make and not stick your head in the sand so that come April 15th you are prepared to pay the piper. Here are my suggestions.
1. Put away a portion of your profits from every sale for taxes. I would suggest having a separate account just for taxes, and put away maybe 1/3 of your profits into this account and don’t touch it…. unless a really good deal comes along and you need some acquisition funds. Just kidding, or maybe not…If you have 20k sitting in your “tax” account and a deal comes across your desk that you cant pass up then maybe you temporarily tap into your tax funds to fund the deal. I would only do this if I knew I could get in and out of deal quickly and replenish my tax account.
2. Document ALL your expenses meticulously so that you can lower your tax liability. Little things like recording fees, notary fees, overnight delivery fees, postage, back taxes, HOA fees, etc are easy to overlook and forget to document. But these fees add up and could significantly lower your tax liability for each land sale.
3. Pay your taxes quarterly as estimated taxes. Anyone who is self employed is aware of estimated tax payments, and they are actually required if you make a certain amount of money in the year. If you don’t make quarterly estimated payments you will be subject to a penalty come April 15th. It’s not a huge penalty, mine was about $100 this year for underpayment of my estimated tax liabilities. Spreading your tax burden over 4 smaller quarterly payments instead of one lump sum on April 15th also takes some of the sting out of paying the ransom payment, the government calls taxes.
I am not a CPA, so this is just my opinion. Hope it helps your tax planning strategy for next year.
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