Wednesday, October 10, 2012

How to Pay Fewer Taxes

 There has been a lot of talk during every election in recent times about people who don’t pay taxes.  We 256px-Victor_Dubreuil_-_'Money_to_Burn',_oil_on_canvas,_1893know the very poor don’t and rightfully so.  But is it right that the wealthy pay little or no federal income tax?  Please take note from the start that I am not an accountant and the examples I am giving are very basic.  Please rely on an accountant for any advice before you start investing.

I knew nothing about this subject until I had some money of my own to invest.  I decided that it was safest to split the investment into high risk and low risk.  The low risk funds were put into Certificates of Deposit; the high risk into mutual funds (stocks).  I did this for a few years.  Then I started thinking.  Could I invest in something other than CD’s and mutual funds?  Something that would be more interesting, something that would bring in income and reduce taxes, something fun?

It wasn’t until I decided to invest in real estate for my own pleasure that I began to understand how investing in something that creates jobs and wealth for others also leads to fewer taxes for myself.  I’m going to let you in on what I have learned.

It takes a significant amount of money to invest in real estate.  Banks are reluctant to make loans to investors and having your own funds is better because you will not become financially over-extended.  After I paid off the mortgage on my own home I was able to save for investment.

My first real estate investment was vacation property.  I will tell you more about that process in the posts that follow.  I wanted to purchase the property for cash.  My maximum was $40-50,000.  Do you know what you can get for that amount?  Almost nothing.  You need plenty of available cash to make the most of real estate investment.

I did find something for that amount and borrowed money on a credit card to fix it up.  Of the $40,000 I paid for the property, I can deduct 1/28 of the cost attributable to the house (not that land) every year for 28 years.  Advertising, repair and replacement costs, utilities, real estate taxes, and other expenses are deductible in the year they occur.  You can find lists of what is deductible on the web.  (Note: I have a tax rate of 10%, so only 10% of this is directly deductible.  If I was in a higher tax bracket (i.e. had lots and lots of money) then I would be able to directly deduct a higher percentage).

Where does the money go that I am not paying in taxes?  To local repair people, local stores, local utility companies, and the county treasurer.  I am supporting businesses which employ local residents.  I am supporting the local government and libraries and other things to which my tax dollars go. 

If I could purchase a rental house for $500,000 (I can’t—I don’t have that much money) and assuming the house itself was valued at $480,000, then my 1/28 deduction each year would be a cool $17, 483.  Not to mention costs for repair and replacement, utilities, taxes, etc.  Are you starting to see that the more you invest, the higher the tax deduction and the greater the investment in the community?  Want to know more about my vacation property experience?  Stay tuned.  More posts will follow.

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