Real Estate Investors: Pick Your Tax Guy With Great Care — One Size Doesn’t Fit All

Posted @ 10:06 pm - Filed under 1031 Exchanges, Purposeful Planning, Retirement Income, Investment Lessons, Tax Shelter, IRS, RE Investment Practice

I was due for the conversation that transpired recently. A friend of a currently inactive client was a few days from entering into a tax deferred exchange. My client called me to ask if I’d talk with their friend about what they were doing and why. Not a problem.

After the conversation with her investor buddy, it occurred to me she had an immediate problem which was easily remedied, but a much larger problem that was systemic. Her tax pro was allowing her to enter into a classic delayed exchange when there was another obviously superior option.

In a nutshell, the investor had unused depreciation in an amount sufficient to offset a pretty impressive hunk of the capital gain she was deferring. In plain English? She’d be able to take out over 1/3 of her net proceeds in cash — without ever paying capital gains taxes. She’d accumulated massive unused depreciation as a result of being barred from using any of it against her ordinary income. (read: job income) Hence, the unused accumulated tax shelter.

By executing a tax deferred exchange (1031) sans the huge tax free cash exit, she’d have been penalizing herself. See, whether she does it using the originally flawed plan, or my way, she’ll end up with the same properties when the smoke clears. What she will have using my approach will be significantly more depreciation. That’s a huge deal down the road. It’ll result in even a larger offset for her next capital gain. We’re not talking chump change here.

So if she’d gone ahead with her tax guy’s original advice, she’d of cost herself, give or take, $50-100,000 in bypassed capital gains taxes the next time around. And all ‘cuz her tax adviser wasn’t versed in the part of the IRC (Internal Revenue Code) dealing with this issue. It’s not rocket science until you aren’t aware of it. (Famous quote from Captain Obvious.)

This is serious stuff people. We tend to treat tax guys, even CPA’s, like doctors. Yet, like doctors, and it’s absolutely unfair to saddle your tax guy with the weight of knowing the entire body of tax law. More clearly put — you wouldn’t ask your wife’s gynecologist to reconstruct your knee. Yet we consistently expect our tax people to magically know everything about everything. It’s not fair to them, and it’s a potential disaster for the real estate investor.

Why?

‘Cuz it’s almost never the answers to questions that cause the problem. It’s the questions you don’t know to ask that find flying out of a plane without a ‘chute.

A quick call to my tax dude (thank Heaven’s it wasn’t last month), had him agreeing with my assessment, and the proper actions to follow. I then initiated a quick conference call, which made everything all better. I owe my guy lunch — and I don’t mean Animal Style. It’ll involve cloth napkins, real silverware, and heavily armed plastic.

How many investors out there are blithely following tax advice contrary to their best interests, or worse, outright injurious? I see it on a semi-regular basis. Heck, my own guy has to ‘get back’ to me sometimes — and he knows real estate like Starbucks knows coffee.

And for the record? Using a real estate agent who is not a full time investment type is an even faster route to nasty April 15th surprises. I’d tell you the stories, but they’d sound so dang stoopid you wouldn’t believe them. More than one has indignantly quoted chapter and verse from the wrong IRC section — no kiddin’.

Your retirement and it’s income is simply too important not to have real pros on your team. Brown and Brown’s team is, (he says, foregoing any false modesty) an all-star squad. If we think your attorney or tax adviser is maybe a little mismatched for what your Purposeful Plan (see podcasts) requires, we get you to someone who knows the answers to questions you don’t know to ask.

Doing things on Purpose is what keeps most folks far from the cliff’s edge. Let’s start a conversation about how close you may be to your retirement. Send me your contact info using the Contact BawldGuy whatsit and we’ll figure out what’s possible. It’s all about making the right decisions.

This entry was posted on Thursday, May 22nd, 2008 at 10:06 pm and is filed under 1031 Exchanges, Purposeful Planning, Retirement Income, Investment Lessons, Tax Shelter, IRS, RE Investment Practice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.