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OFFICIAL MAGAZINE OF THE NATIONAL ASSOCIATION OF REALTORS®

Daily Real Estate News  |  October 31, 2005  |   Real Estate Investing: A Double Win for REALTORSŪ "If you or your spouse is a real estate professional and you pay any taxes at all, you either don't own enough property or aren't taking advantage of the tax breaks the law provides." Those are the words of Diane Kennedy, whose session Friday afternoon revealed effective tax strategies successful real estate professionals use to maximize profits and save on taxes. Investors can use Kennedy's "tax-advantaged wealth building" approach to either defer or avoid tax. Kennedy's first recommendation is to create a business to shelter tax. By structuring it as a subchapter S or C, you'll avoid self-employment tax and pay a far lower rate. Use 1031 exchanges to defer taxes. If you're going to hold a 1031, Kennedy recommends, the best way is as an LLC. Kennedy cautioned attendees to create tax-smart business structures. The IRS is stepping up enforcement efforts and is focusing on sole proprietorships. For partnerships, she recommends an LLC structure. How to maximize tax deductions? If you look at potential investments on a trip, for example, a portion of the trip is deductible, as is dry cleaning clothes for the trip. If you pay your children to work, you move money from your tax bracket to theirs. Kennedy dispelled myths about home offices: they no longer need to be your only place of business, and they will not count against your capital gains exemption when you sell your home. Kennedy is a fan of the Roth 401(k), which will go into effect on Jan. 1. This plan will be a boon for sole proprietors, since it allows you to contribute up to $15,000, the funds can be invested as you choose, and there are no income limitations. If you use a Roth 401(k) to invest in real estate, set up the investment as an LLC so you can administer it yourself. Minimize your business income by classifying parts of your real estate as personal property, which depreciates on a much faster schedule. You may even be able to achieve a tax loss, and as a real estate professional, you can write off that loss against your income. Real estate investments make money through active appreciation (improvements), passive appreciation, cash flow, and tax benefits. Real estate professionals are in an ideal position to make the most of real estate investments. Kennedy also recommended maximizing the debt in your home, to stay liquid. A line of credit is her vehicle of choice, since it can be used only when needed. "Debt protects you; equity protects the lender.” —Hilary Marsh for REALTORŪ Magazine Online

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