As the US financial Systems begin to get more complicated, people are finding a greater need for taking professional financial advice. Even though more than 300,000 financial advisors are there in the US today, people are not getting adequate professional advice for their specific situation. Most advisors are more concerned about their fees than advice. It is not that one-size-fits-all. Every citizen needs customized advice as per their industry involvement, family situation, and life goals. The real estate investors, landlords, and developers have a unique need for requirements for financial planning. They are not so much concerned about the latest investment fads than with tax-focused planning.
Investment planning involves taking a higher risk if one desires higher returns. Though most people are open towards taking investment risks with real estate, they lack the confidence to invest in non-real assets. Most people are comfortable with holding currency but do not rely on investing in stocks. A real estate investor should think of investment planning and diversification.
It makes sense to allocate lesser non-real estate assets to cash instead of yielding on liquidity, emergency, and next deal funds. Diversified allocation to global stocks would help increase the household diversification.
Real Estate Diversification
Diversification in real estate is required to safeguard investment risk. One must consider diversification regarding location, type, or sector of a property portfolio. Instead of investing solely in multi-family properties and rental properties, it is better to own a combination of commercial offices, forest, industrial and timberland properties. One must plan on lowering investment risks. Investing some real-estate gains and putting them towards other properties will be a good option in the long run.
Consultation on Business Planning
A real estate advisor or a financial planner may consider more than investments. The financial planner will provide professional consultation services in property investment and taxation. Such advice is especially helpful for investors as they get a perspective on entity selection, deals structuring, and capital commitments. Landlords can get answers to their concerns about mitigating risk and liability regarding investment properties.
An investor should think about containing a liability company or umbrella insurance. These are cost-effective solutions to protect the real estate investor’s interest if litigation should happen concerning the property.
The selection of a real estate advisor is necessary. The advisor must provide dedicated service in property management to the client and help to cut taxes. The owners should offset their income with losses on rental property and avoid the investment income tax on rental income, which sums to 3.8%. Consider cash management solutions, like property portfolio financing. Renting-out office space could be a financial opportunity for the owner.
Planning Real Estate for Taxes
Tax planning is an essential part of real estate planning. Buying or selling of properties can have a considerable amount of impact on the tax cost. With proper planning, one may considerably reduce the tax cost.
One must think about the following aspects before making property sales:
- 1031 Exchanges
- Installment Monetized Sales
- Installment Sales
- Withheld Sales Trust
- Zone Funds Qualified Opportunity
- Application of Outside Tax Loss
- Donation of Appreciated Assets
- Availing of low tax brackets ranging from 10% and 15% brackets
- Donor-advised Foundation/ Fund
- Upstream Gifting
- Charitable Remainder Trust
- Holding until death for step-up in basis
It is required to review Cost segregation to minimize income taxes. In the past decade, developers and owners have benefitted from accelerated depreciation and tax deductions. A complete analysis of the cost segregation strategy by a good advisor would benefit under these mentioned circumstances.
Planning for Retirement
Everyone retires sooner or later. Most people add money to 401k plans provided by their employers. However, estate investors offer more options. As a business owner, one can make a retirement plan for personal needs.
These are a few of the retirement plan options:
- 401k profit-sharing plans
- IRAs or Roth IRAs
- Safe Harbor 401k profit-sharing plans
- SIMPLE IRA
- Solo 401k or SEP for firms with only owners
- Non-qualified deferred compensation plans
- Personal defined benefit plans
A qualified professional will help determine a good plan and further design it to meet your goals while complying with the applicable laws.
One pays taxes on businesses from the federal government to the city hall. One needs to be aware of the type of taxes applicable to the company and when to file them. If one makes a mistake, the tax bill will grow. On the other hand, planning and taking available deductions, making correct tax returns will save on the tax amount applicable to the business. Every individual needs to do estate planning. The strategy must be well thought out, keeping in mind the laws applicable to real property. For instance, instead of gifting low-basis property, it is better to use it as a leverage to secure finances.
It is a common strategy to use a real estate holding company for a family limited partnership. The family limited partnership (FLP) provides a place for ownership and the management of different types of assets. In a typical scenario, the management control lies in the hands of both parents. A family limited partnership can help save income tax as it allows better income distribution among the family. An income transfer from high tax brackets of the parents to lower tax brackets. According to their partnership interests, the assets are transferred to new owners, and income and deductions are included in their accounts. Family limited partnerships consolidate real estate investment management, improve liability protections, and make wealth transfers possible to the next generation.
Life Insurance, especially ILIT or Irrevocable Life Insurance Trust, is a tax-free tool for paying estate taxes, a cross-purchase agreement, or start property acquisitions between family members.
One’s household’s financial status is as important as their business and investments. It is essential to create a balance sheet that includes a cash flow plan regarding your expenditures. It allows one to assess personal saving habits, spending habits, and values.
It is clear that whether you are an individual, a business, or a family member or all three, you need a qualified financial planner’s expert advice on real estate investments for a promising financial future. A qualified financial planner will help you with your cash flow plan, invest in real estate to give your finances a direction. Financial planning being complex does not get any easier if you go into real estate investing. Many aspects need expert advice. Playing it too safe in your financial investments and retaining cash that goes nowhere is not a good idea. It is better to opt for diversification as investing in the stock market will reap you financial benefits. Diversification is the key to real estate investing. As a real estate investor, one must think of making a registered investment in a different property type than a multi-family property. Other financial planning investing options in properties include commercial and industrial or timberland, to enhance your financial future. Also, think of directing a portion of your cash flow from your financial gains into new investments. While doing your financial planning, a qualified professional consultant will provide services in property investment and taxation. One can opt-in or out of a registered investment, the right way, and at the right time. Financial planning with real estate helps to lessen income tax and get the max financial gains. For parents, FLP directs the income, cash flow, and deductions to the smaller income tax bracket holders as your children. FLP helps to consolidate real estate investment management and make wealth transfers possible to the next generation. With a good investment advisor, real estate investing becomes easier.