[Note: To follow is an excerpt of an interview with Peter Jeppson, co-founder of Money Mastery, a financial literacy and coaching program designed to help individuals and families get in control of their finances. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/010709.]
Mosca: We know the goal of tax planning is to arrange financial affairs so as to minimize taxes. The good news for income property owners is that tax planning for rental property opens up many opportunities for sizable tax deductions. The bad news of course about being a landlord is that all the income you earn from your rental units is subject to Federal and State income taxes. Can you discuss ways real estate property investors can reduce their taxes in 2009?
Jeppson: When people have income of any kind, earned or passive, that dictates how it's going to be taxed. When a person approaches real estate they need to approach it like a business, not a hobby but a real full-blown business. To do that, it's important to keep track of your activities. Start a diary. For example, if I'm going to do something in real estate, it's important that I have a meeting with everybody involved. Even if you have a meeting with yourself, keep an agenda and notes. If you have planned in advance what you need to be doing on the tax side, you can set up your real estate holdings inside of an entity.
Mosca: Do you do this to have of an exit strategy?
Jeppson: Yes, whenever you enter you must have an exit. Taxes are not everything; it's just one part of the whole piece. So, pushing it around and pushing it into a new year is important. When you fail financially, let it come straight down and not go out laterally and hurt your credit, lose money in other areas, and then like the domino affect effect so many more things. It's so important to be organized properly so that you have it in such a way that it doesn't bump in to everything else and destroy it.
Mosca: What are some of advantages of creating an LLC?
Jeppson: You can set up the LLC to be managed by a member. A manager that's not even an owner can also manage it. Say, for example, I have five children and they each own a fifth of the LLC, or 20 percent. I can manage that LLC and not even own any part of it. I can take a management fee, I can control everything, I can enter into all types of contracts, and I can market the company, whatever I wish as a manager. Now, let's bring that home. If you were to total your personal assets, home, car, and savings, most people would have more money in the personal side than they would in the business side. Let's say the business is really tiny. It's a small circle. But on the left side is your personal and that's a bigger circle, not to put any numbers with it. So, if someone is going to sue you, which circle are they going to sue? The bigger one on the left is your personal assets, home, car and savings or the one on your right, your business that doesn't have very much in it? The goal is to create this business. You want to invest in real estate and grow your real estate business on the right side so it would be huge compared to your personal assets. In an LLC I can be a manager and not even own any of it. So none of the assets of the LLC are available to any creditors.
Mosca: Why don't investors hear about ideas like this from financial planners or CPAs?
Jeppson: Let's take a typical experience. Most people put their receipts in a shoebox of some kind, and walk into the accountant. Can you imagine how the accountant feels having to go through all the receipts and to do all the detail on that accounting? What happens is these accountants will hire people for $15 an hour to put all that detail together and charge you maybe $50 an hour for their services to cover overhead and their time. Bottom line: they don't like seeing a shoebox with receipts. Are they going to stand up to you and say, “you're an idiot and by the way I'm not going to do your taxes anymore?”
Mosca: No, not really because it's to adversarial.
Jeppson: Well-said Peter. So, what happens is they never come to you before the end of the year. Notice that when you see them the year is done. The door is shut. You're not going back and you can't do one thing about it.
Mosca: What can we do?
Jeppson: Get organized. Control spending, eliminate debt, maximize your savings, and reduce taxation. That starts with a spending plan, and that starts with a tax plan. If you start with the end in mind, it helps. If you get some knowledge and information, then you know how to direct your accountant. That's what we do. Accountants have a way of doing accounting. They have a system. Say to your accountant, “Set me up, set my books up and tell me how I should keep them and I'll keep them your way and when I bring them to you then you can do them in minutes and charge me a whole lot less than I can take every advantage of all the tax savings.” [For a free consultation with peter, go to IncomePropertyInvestmentTalk.com/010709 and put in FREE OFFER.]
Mosca: What is your take on the Obama administrations plans as they relate to capital gains taxes. I believe he is going to leave them alone for the next 12-18 months. What do you see?
Jeppson: I agree with you Peter. I think he is going to leave them alone. If he jimmies them too much, I think they are going to fall off the edge. I don't think he can afford to make too many more changes. When the Federal government puts a certain money supply out there and then the banks do not loan it out or to each other, the money is not moving in the economy. Until the confidence level comes back, we are not going to see money moving. When Lee Iacoca took charge of Chrysler Motors and they needed a loan and the government bailed them out, at the last moment the government said I want to buy stock in Chrysler instead of giving a loan. When Chrysler solidified, the government sold their stock for seven times more than they paid for it.
Mosca: What is your golden nugget?
Jeppson: Put a spending plan together. Tie it to the way you are personally organized. An annual review is important. See where you are, where you are going, what has happened well, and bad, and do the comparisons.