LandInvestors.com Forums **Ask A Question** What I learned about taxes in the land business

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    Bret Lorenson
    Participant
    Post count: 24

    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.

Viewing 15 replies - 16 through 30 (of 31 total)
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  • Matt Rogers
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    Post count: 54
    ProAdvanced

    It was referenced earlier in this thread from May, but if you choose to tax your LLC as a S-Corp, you’re only responsible for SE tax on the amount you pay yourself as salary on the books, so you won’t get double taxed very hard. The rest of your company profits are treated as dividends to you the owner (not you the employee), and are not subject to the SE tax.

    I did this exact setup for a previous LLC taxed as a S-Corp in another field, and it worked out very nicely. Of course you’ll still have some taxes, but don’t pay yourself a big salary, keep track of all expenses/receipts for maximum deductions, and you’ll be fine.

    Peter Toth
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    Post count: 51
    Pro

    Here is another idea…having your own business means you can set up a solo 401k and put away up to about $54,000 per year ($18,000 and then 25% of profits and assuming you are making money). If it is self directed you can then invest in….real estate (with caveats of course). I am about to do this now.

    Anyone else look into this?

    You can also use a self directed IRA (with certain limits).

    Milan
    Participant
    Post count: 511

    Great tips Matt and Peter. Solo 401K might be a great option! S Corp too.

    Bret Lorenson
    Participant
    Post count: 24
    Pro

    I setup a solo 401k last year and it has been great. I did mine thru Justin at discountsolo401k.com. Found him thru bigger pockets. Cost about $600 to setup but it offers great flexibility in that you do what you want with your retirement funds. It gives you checkbook control of your funds. I sold all my stocks and now invest in tax liens, and other land and real estate investments, in my retirement account. I have not setup the S-Corp yet but that will probably ha[[en this year. The solo 401k is a great option for land investors and helps out with the tax burden as well.

    Bret Lorenson
    Participant
    Post count: 24
    Pro

    I did my solo 401k with Justin at discountsolo401k.com. Cost $575 to setup and $100 a year for filing the annual required paperwork.

    Milan
    Participant
    Post count: 511

    That’s pure gold of concrete info Bret. Yeah! Love it

    Peter Toth
    Participant
    Post count: 51
    Pro

    Bret,
    Great info…are you doing any land transactions in the plan?

    Any concern about how many buys/sells?

    Joe Snustad
    Participant
    Post count: 38
    Pro

    I’ve heard of this idea, utilizing a self directed IRA to shelter your business and defer taxes. My initial thought would be (once established) that a guy could invest in land half and half. Half through your IRA and half through your self-employed self-owned business. This can shelter you from taxes on 1/2 of your gains, and only pay taxes on the 1/2 you decided you needed to keep separate (maybe to be able to collect a paycheck or buy a sweet boat with or something).

    My wife and I recently learned about a backdoor Roth IRA. Typically there is an income limit that doesn’t allow a household to invest in a ROTH if you make too much $$. The backdoor roth allows you to convert a traditional IRA into a ROTH. You would still have to pay taxes on this amount when converting, but then it would grow tax free. I know this thread is about reducing your tax footprint, but we also have to plan for when we “retire” and take this money out. A retirement account growing tax free would be real nice later on.

    thanks for the S-Corp suggestion! I will be speaking with my CPA on all of this soon!

    Speaking of, we have to have a CPA in this group right?? he/she should be introduced to this thread and shed some light!

    Michael Anderson
    Participant
    Post count: 2

    While there is a lot of talk on here about the way you structure you business, you could possibly do a 1031 exchange on your deals since you are taking the profits and using them for property of equal or greater value. A properly structured 1031 exchange could possibly “allow an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.” Just a thought.

    Michael Anderson
    Participant
    Post count: 2

    The potential issue for a self-directed IRA is that you HAVE to funnel all profits used from the IRA back into the IRA; you couldn’t “split” the profits between yourself and the IRA. So say you used 4K from the IRA and you made 8K on that sale, doubling your money. All 8K would have to go back to the IRA. Now, if you used 4K of your own money + 4K from the IRA and you again doubled your investment to 16K, you only have to funnel 8K back into the IRA. Does that make sense?

    Even though it is “self-directed” it still has to be administered by an approved administrator. If you are needing funds quickly, using the funds from the IRA could be counter-productive because of the time it takes to transfer funds. If you are not in a hurry and you are not looking for everyday spending money, then the IRA is a good way to go for long term investing.

    Dave Ayres
    Participant
    Post count: 21
    Pro

    Very nice gentlemen! Yes thank you for the detail Brett. Love the idea of
    “checkbook control” for retirement funds.

    Jay Jones
    Participant
    Post count: 4
    Pro

    I also have a Solo 401k with checkbook control, but I am a little nervous to invest in quick-flip land deals. If you look like you are “running a business” inside of your retirement plan, you could be penalized. Some tax professionals will go out on a limb and say you should be safe if you just do 2 or 3 per year, but the more conservative professionals wont even say that.

    I feel a little safer doing some terms deals that I plan to hold for over a year.

    I am also beginning to think it may be safer if my retirement account is just a money partner in an LLC. I’ll be looking into this next.

    Another idea that would be available with a Solo 401k (not an IRA), is “loaning” yourself money from it. You can do it for up to 5 years and pay your Solo 401k a reasonable interest.

    Just a few cautions about using IRA’s and Solo 401k’s. Do your research and talk to your tax professionals. There are a lot of rules in this arena that were not exactly common sense to me. If you break the rules, the damage can be catastrophic (i.e. imagine losing half of your IRA to taxes and penalties). The rules are similar for the IRA and a Solo 401k, but the Solo 401k seems to be more forgiving and fixable if you make a mistake.

    Jay Jones
    Participant
    Post count: 4
    Pro

    Regarding treating our land purchases as capital investment with short and long term capital gains… I like the idea of this and the idea of using 1031 exchanges too. However, is there anyone out there who would caution against doing this? I seem to remember something about us being considered “dealers” with land being our inventory.

    Milan
    Participant
    Post count: 511

    Great stuff guys!

    Maybe a very stupid question. If we are dealers, and i believe we are, than land we buy is inventory, isn’t it?

    now let’s say you sold land for 40K profit for a year. And than you buy new land (inventory) for 40K.

    Is inventory tax deductible? 40 – 40 = 0 Zero taxes for a year.

    I think it doesn’t work this way. But I am ok with being complete dummie here.

    Marilyn Sevigny
    Participant
    Post count: 52
    Pro

    My accountant sends out newsletters and this is what I received yesterday. I thought it was very helpful.

    http://bza.me/?C7EZVGHow to Save Tax with An Installment Sale

    How to Save Tax with an Installment Sale

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