Category: Kathy Kennebrook’s Insightful Articles

 and Stefan Kasian PHD

Like it or not, having inquiries on your credit report can get you turned down for a loan approval or credit report. I’ve applied for credit for years for myself and my clients, and I can’t tell you how many times a bank wrote a rejection letter that we were turned down for a credit card “because of excessive inquiries.”

No matter what a creditor tries to convince you of otherwise, inquiries DO lower your credit score. Granted, some mortgage companies, for example, only consider your most recent inquiries for past 3-6 months. The more you have, and the more recent you have them, the more your score is lowered. And a lower score also means you will end up paying a higher interest rate on your credit, which could cost you thousands of dollars over time.

In fact, many business and personal credit line services who specialize in obtaining credit lines for their customers won’t even touch you if you have more than 2-3 inquiries per bureau.

But how do you delete inquires? The bureaus may like to tell you the propaganda that inquiries cannot be deleted, they are permanent, and stay on for months, even years.

Nothing is farther from the truth. Based on years of trial and error, Kathy Kennebrook and I have uncovered some of the best ways to remove inquiries.

Follow up next week for all the information you need on deleting inquiries from your credit score. In the meantime checkout Kathy Kennebrook’s website at www.marketingmagiclady.com for all of the tools you need for your Real Estate Investing Business. While you are there sign up for Kathy Kennebrook’s free newsletter and receive 149.00 of real estate investing tools absolutely FREE!!!

Albert Aiello, CPA, MS Taxation, RE Investor

I am talking about the most powerful deduction for the real estate investor – Depreciation — which is an annual tax write-off of the cost basis of assets held for rental or business-use, such as real estate.

Why this “NO-cash-out; yet cash-IN” phenomena?

The first part, “NO cash out” is because the determination of depreciation is based on the entire cost of the property, regardless of how the property is financed. So you can do what is so frequently done, put little or no money down on a property and still take depreciation on the entire cost of the depreciable property. That is, you do not have to spend any cash for valuable depreciation deductions.

The second part, “cash IN” is because of the tax savings generated by depreciation, especially with componentizing (discussed later). That is you pocket the tax savings, while the property is appreciating. For example, a $20,000 depreciation deduction reduces your ordinary income. In a 30% bracket this will save you $6,000 in taxes. This is like found money because you did not have to spend any additional cash to get the deduction. The $6,000 as a 10% down payment can allow you to buy an additional $60,000 worth of real estate, which, at a 20% yearly return, would be $12,000 more income every year. Plus, like money in the bank, you get the deduction and tax savings every year (for the recovery period of the property). Yet, when you sell, you can have no recapture and thus not have to pay any of these tax savings back by selling the property, tax free, via the powerful 1031 Exchange or other tax-free selling strategies. You still continue to pocket the tax savings from depreciation! You get the best of all worlds! Get the picture? Money makes money but saving taxes (every year) makes a whole lot more money, so you can get richer, faster!!

So how can you make this already valuable deduction save you even more money? Componentize!

Componentizing (or Cost Segregation Analysis) is something that I have been using for over 25 years to dramatically increase my cash flow (and wealth) via tax savings from much larger depreciation deductions.

Reason: With componentizing, you break out components, from the property cost, that allow you to use shorter recovery periods with the result of much larger deductions and savings. For example there are many items that can qualify for personal property and be rapidly written off over 5 years (double-accelerated) instead of slower building depreciation of 27-1/2 or 39 years straight-line (or 6 times faster than the building). There are land components that too can be rapidly written off over 15 years (accelerated) instead of 27-1/2 or 39 years straight-line (or 2 to 3 times faster than the building).

Moreover, with my Goldmine system of componentizing, you can justify a low or no land value for even more deductions and savings.

Furthermore, you can also fully deduct the remaining basis of components that are replaced.

For example, if you replace existing property components with a remaining componentized cost basis of $30,000, you can claim the entire $30,000 as a full ordinary deduction. In a 30% bracket this puts $9,000 of savings in your pocket, yet you did not have to expend cash for the deduction!

So how much extra did you pay in taxes not using componentizing because your tax advisor did not know about this incredible legal strategy?

According to the follow quote from one of my students, probably a lot!

“Al, your component depreciation method saved me almost $20,000 dollars in income taxes. It helped me financially having four girls in College at the same time.” …Angelo D. Guerra, Investor, Broker/Owner, ERA Platinum Realtors, Conshohocken, PA.

By the way, that’s $20,000 a year, which if invested at 10% a year for the next 10 years would accumulate to over $318,000! But with real estate the returns are even greater; so if at 20% for the next 10 years, the savings would accumulate to over half-million dollars, which is what you are really losing without this great wealth system!!

___________________________________________________________

The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System by Albert Aiello. The specially designed forms on disk enable Real Estate Entrepreneurs to document, with tax law citations, large write-offs of depreciation and reap huge savings every year. For more information on all of the tools you need for your real estate investing business, visit Kathy Kennebrook’s website at www.marketingmagiclady.com or call the office at 941-792-5390.

Albert Aiello, CPA, MS Taxation, RE Investor

There are three major tax-saving benefits of classifying expenditures as repairs rather than capital improvements. One of them is immediate tax savings. For example, the owner of a rental property is in a 31% tax bracket and pays $20,000 as a repair is an immediate deduction which is worth $6,200 in tax savings. But if the $20,000 is capital “punishment” it must be written off over 27-1/2 years = an annual deduction of about $720 year = tax savings of only about $200 in the first year. A difference in immediate tax savings of $6,000! These tax savings could be used as an immediate source of down payment monies for other income-producing real estate.

There are over 60 tax saving ideas to convert capital improvements into fully deductible repairs! Let me share some of them with you.

Þ COMPONENTIZE IMPROVEMENTS – Just as a big forest is made of many smaller separate trees, so is an extensive plan of improvements made up of a series of smaller, separate repairs. That is, much work resulting in the “permanent improvement” to a property, in essence, consists of a series of “separate repairs”. Such repairs could be immediately deductible if documented separately. Otherwise they will lose their nature as repairs if they are part of a general plan of improvement or reconditioning. You therefore need to componentize or fractionalize the large expenditures into a larger number of smaller, separate jobs. It helps if each job is done separately & independently, over more than one year. Do this with separate invoices and separate contracts for each job. This is what the tax court said in Cobleigh, TC Memo, 1956-261.

Þ DOCUMENTS (SUCH AS BILLS & CONTRACTS) SHOULD BE WORDED AS “REPAIRS” – Use such words as: “repairs”, "prevent damage", “patch”, "temporary", “incidental", "minor", “fix”, “piecemeal", "annual", "less than a year", "decorating", "painting", "small", etc. Also, the prefix “re” is effective. For example, “repaint”, “repatch”, “repaper”, “recoat”, “resurface”, “redo”, etc. These have been in the taxpayer’s favor in deciding that expenditures were repairs.

Do the above and put more tax dollars in your pocket!

___________________________________________________________

The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. The specially designed forms on disk enable RE entrepreneurs to document, with tax law citations, large write-offs of repairs and reap huge tax savings. For more information on all the real estate investing tools and tax saving tips, visit Kathy Kennebrook’s website at www.marketingmagiclady.com or call the office at 941-792-5390

Albert Aiello, CPA, MS Taxation, RE Investor

Here is a quick overview…

AVOID INEPT CPA’S, LIKE THE CURSE OF HELL!

Bad tax advisors cause more investors to pay more taxes than the IRS can ever dream of. Ask your follow investors for some good prospective CPA’s who specialize in real estate. Get references and carefully screen them out. NO CPA? Like a bad tenant…having NO CPA is a heavenly dream next to having a bad one. Many of my students do not have a CPA or use one on a very limited basis. Instead they use a good home study course on real estate tax reduction along with tax preparation software such as TurboTax. They rave about how they legally save more money than they did previously with a CPA, but without the high fees. Now this is not for everyone. But if you do use a CPA, make sure that you have at least a general understanding of real estate tax law and that the CPA is working for you; because no one cares more about your money than YOU!

AVOID IRS, LIKE THE BUBONIC PLAGUE!

Reduce your changes of audit by filing extensions and staying off heavily audited schedules such as Schedule’s C or E. File as a partnership, form 1065, which is much less audited. If you want the asset protection of an LLC, then a two or more member files the lesser audited partnership, form 1065.

CREATE VALUABLE “PAPER” DEDUCTIONS

That is “paper” deductions that do not require you to expend cash for, yet it creates cash flow in your pocket via tax savings – Depreciation. A very profitable system of depreciation is componentizing (also called Cost Segregation Analysis). Componentizing is something that I have been using for over 25 years to dramatically increase my cash flow (and wealth) via tax savings from much larger non-cash depreciation deductions. And so have my students. With componentizing, you break out components, from the property cost, that allow you to use shorter recovery periods with the result of much larger deductions and savings. For example there are many items that can qualify for personal property and be rapidly written off over 5 years (double-accelerated) instead of slower building depreciation of 27-1/2 or 39 years straight-line (or 6 times faster than the building). There are land components that too can be rapidly written off over 15 years (accelerated) instead of 27-1/2 or 39 years straight-line (or 2 to 3 times faster than the building). Furthermore, you can also fully deduct the remaining basis of components that are replaced (gutted out). For example, if you replace existing property components with a remaining componentized cost basis of $30,000, you can claim the entire $30,000 as a full ordinary deduction. In a 30% bracket this puts $9,000 of savings in your pocket, yet you did not have to expend cash for the deduction!

AVOID PASSIVE LOSS LIMITATIONS – FULL DEDUCTIONS

Except for $25,000 of losses, rental property tax losses are subject to passive loss limitations which means real estate investors cannot deduct rental property losses against other ordinary income such as W-2 income, business income, gains, IRA distributions, etc. If the investor’s adjusted gross income (AGI) is above $150,000 they will not even be allowed the $25,000 annual “active” exception for deducting such losses. The losses are “suspended” and must be carried forward until the property is sold. To avoid being subject to these limitations, the investor must document that they incur enough hours in the real estate business at a minimum of 751 hours, which is an average of about 14-1/2 hours a week.

TOTALLY AVOID THE TAX DRAIN OF BEING A “DEALER”

Altogether, there are over 30 strategies to avoid the costly consequences of a dealer. My experience indicates that one of the best ones is to demonstrate that the primary purpose of the resale profits is for investment purposes and not sales speculation. For example, the primary purpose (or purposes) of the profits can be for a number of “investment necessities”, such as down payment funds to acquire long-term investment keepers, or working capital for property investment operations including preventive maintenance.

Accordingly, as employed here, these flips are non-dealer, investment transactions with solid economic foundation. This is a very powerful defense against any IRS attacks. Consequently, there are numerous cases and scenarios, some of which I have had firsthand experience with, where even a huge number of sales in one year did not cause costly dealer status.

SELL PROPERTIES TAX-FREE – YOU KEEP ALL THE PROFITS

One of the best strategies to avoid all tax liabilities on the sale of investment property is a 1031 exchange. Understand, 1031’s do not just defer taxes, but by having the interest-free and payment-free use of the tax savings, you have more buying power for the replacement property. For example, if you save $20,000 in taxes by doing a 1031, as a 10% down payment, $20,000 empowers you to buy another $200,000 worth of real estate. In fact, many times, the 1031 savings, combined with leverage, is the difference that makes the difference in doing the deal. My students like to use the higher untaxed equity from a 1031 exchange to roll over into property they intend to keep so they can reap the cash flow, equity buildup and tax deductions (esp. depreciation) you get with keepers.

SELECT THE RIGHT ENTITY

Start off with right form of ownership entity. Do this not only to protect you, but also to support tax deductions that typically would be more aggressive if taken as a sole proprietor. With an entity, such as an LLC, you can use corporate-like documents (such as an operating agreement, minutes or resolutions) to authorize and thus support deductions. Here, you have this statutory LLC entity (separate from its members), via legal documents (such as an operating agreement), authorizing tax saving deductions and strategies. This is excellent documentation, especially with IRS hot spots such as active participation for bypassing passive loss limitations; avoiding dealer status, as well as deductions such as auto, meals, entertainment; travel to find property; educational tuitions for boot camps; travel to such educational events; and the like.

__________________________________________________________

The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. For more information on real estate investing and tax savings, visit Kathy Kennebrook’s website at www.marketingmagiclady.com

Albert Aiello, CPA, MS Taxation, RE Investor

“POOR RECORDKEEPING IS A MAJOR CAUSE OF SMALL BUSINESS FAILURE”… The U.S. Small Business Administration (SBA)

All successful people keep good records so they can control, improve and develop their business. When it comes to taxes, poor recordkeeping also means lost deductions, more taxes, more IRS problems and more costs to you. Let the government pay you for good records! This is one of Kathy Kennebrook’s favorite ways to save money in her business.

For example, you are in a 40% tax bracket. Because of your good business organization you come up with another $2,000 of deductions. In the 40% bracket these deductions equate to $800 in tax savings or a government pays check as a reward for your entrepreneurial organization. If the recordkeeping took you an unlikely 8 hours, you would have been paid a nice $100 an hour from the government. Recordkeeping also keeps you out of trouble with the IRS, as it documents your business expenses.

HERE ARE SOME PROVEN SHORTCUTS WHICH CAN SUBSTANTIALLY REDUCE RECORDKEEPING TIME:

Þ USE THE "DOWN-TIME APPROACH" — This reaps valuable deductions you would otherwise miss. You record out-of-pocket cash expenses during the “down-time”, such as — waiting at a drive-in bank, waiting at a gas station, waiting in a traffic jam, waiting for a client or waiting for whatever. For those of us who live in cold winter climates, a good time to catch up with some valuable recordkeeping is in January when you are stuck at home in a winter storm.

Þ KEEP AN ENVELOPE IN YOUR CAR — Each day as you start your car, let the engine warm up a bit so you can make your entries, including your odometer reading and places you intend to go. Use the envelope to hold the receipts you acquire during the day. Start a new envelope every month. On each envelope, write the month and year.

Þ FOR BUSINESS AUTO TRAVEL, INSTEAD OF 12 MONTHS, USE A 3-MONTH "SAMPLING" — You are allowed to use a 3-month “sample” period to compute your business mileage for the year, provided it is representative of the full tax year. For only 3 months of the year, log in your dairy each of your business trips with mileage. You should select the 3 months where you are the busiest so you can get a high representative business-use of your auto. Once you set it up, it’s easy and a real time-saver! Kathy Kennebrook carries an envelope with her when she travels and places all the receipts from her trip in it, and during “down time” in the airport she records her cash expenses on the outside of the envelope. Kathy Kennebrook has found that this one technique has added thousands in deductions for her through her business.

Þ DON’T YOU DO THE RECORDKEEPING…USE OTHER PEOPLES TIME & TALENT ("OPT&T") — Don’t get bogged down in unproductive detail. It will soak up valuable time that you could be using to earn more income. Instead, leverage your time by employing a personal assistant (who could be your children or spouse*) to take care of recordkeeping and other clerical duties. [*Note: You can also receive additional income tax benefits by employing family members in your business.]

Þ USE CREDIT CARDS — By using credit cards you have the necessary receipts and canceled checks. Use the credit card companies that send annual tax summaries which have your tax-related expenses already totaled and classified for the year.

Þ DO RECORDKEEPING FREQUENTLY! — Preferably daily. At the very least, do it every month instead of waiting until the end of the year when everything piles up, when it then takes 5 times as long!

One thing is for sure, NEVER WAIT UNTIL YOU ARE AUDITED, UNLESS YOU LIKE HORROR STORIES!

­____________________________________________________________

The above are excerpts from The Real Estate Investor’s Goldmine of Brilliant Tax Strategies, A Tax Reduction System And Special Forms Software Package, by Albert Aiello. For all your real estate investing tools visit Kathy Kennebrook’s website at www.marketingmagiclady.com