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TORRANCE, CA. Trump’s new tax laws increases the standard deduction, and makes changes in the tax rates, but this is not how Mr. Trump reduces his taxes. He knows that the income tax liability is derived by multiplying taxable income by the applicable tax bracket rate. The lower the taxable income, the lower the rate, thus the lower the tax liability. Here in lies Trump’s tax savings plan. TRUMP’S THREE WAYS TO LOWER TAXABLE INCOME. 1. Spread income over time 2. Spread income to various entities 3. Group income and expenses Knowing each of these three concepts will permit you to intelligently implement a tax-savings plan like Trumps. Spreading Income over time Time Real estate provides the opportunity to spread income over several years using the installment sales method of reporting. By accepting a relatively low down payment and spreading the principal payments over several years, total taxable income for any one year is reduced. In real estate the tax-deferred exchange method, income can also be spread over time. Both methods can be structured to give you maximum re-porting flexibility. Spreading Income to Various Entities Spreading income to various entities reduces the income any one entity has to report. By transferring ownership of assets to corporations, partnerships, relatives, or trusts, an effective transfer of income can be accomplished as well. Relatives in low-income brackets can be paid for services provided. As long as these services represent legitimate business transactions, spreading income in this manner can save you thousands of tax dollars. When operating entities have dissimilar tax reporting years and basis (cash or accrual), it is possible to spread income and expenses over different years to take advantage of the tax laws. Group Income and Expenses Grouping income and expenses can lower taxable income. Real estate provides the flexibility to implement this kind of tax-planning tactic. More specifically, real estate, it fit nicely within the definition of active participation rules. When changes in either income or expenses can be projected, the benefits of grouping are phenomenal. For example, refinancing will create a higher interest expense deduction to offset anticipated increases in rental income. Short-term loan contracts with high points will accomplish the same thing. If expenses are projected to increase, offset them by increasing receipts from installment contracts. Avoid reporting income when notes become due by renegotiating an extension of time. If the senior mort-gage matures before your note, subordinate it to new financing to avoid payment. Capital gains and losses can also be grouped to maximum tax benefits. With restrictions, capital losses may be used to offset capital gains plus additional amounts of ordinary income. INCREASING THE DEPRECIATION DEDUCTION Maximize the deduction for depreciation: 1. To increase the depreciable basis of the asset, take the higher of either the tax role or an independent appraisers evaluation. 2. To decrease the length of time the asset is depreciated, identify personal property assets. They can be depreciated over shorter lives. Various methods of depreciation are used for different classifications of personal property. Properties with lives of three, five, seven, and ten years may be depreciated by the 200 percent declining balance method. The greater the depreciation, the higher the expense deduction, and the more the Internal Revenue Service (IRS) helps to pay for your investment. CONVERTING REAL PROPERTY INTO PERSONAL PROPERTY The IRS defines tangible personal property as any personal property except land and improvements thereto, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures) (Reg. 1.48-1[c]). The courts have concluded that “permanency” is the most pertinent test in the determination of whether an asset is a structural component and not personal property. They have applied six tests to assist: 1. Is the property capable of being moved and has it in fact been moved? 2. Is the property designed or constructed to remain permanently in place? 3. Are there circumstances that tend to show the expected or in-tended length of affixation? 4. How substantial a job is the removal of the property and how time- consuming is it? 5. How much damage will the property sustain upon removal? 6. How is the property affixed to the land? Trump is s real estate mogul. He saves money by using of the above strategies in his real estate deals. When you own real estate you be able to use the same strategies as Mr. Trump; however, unlike Trump may have to show them. ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute. He is author of four best selling books and many articles on real estate rental income investing and taxation. To purchase a subscription to Market Cycles and to learn more about the Center for Real Estate Studies, please visit us at http://www.calstatecompanies.com
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