4 Investing Mistakes to Avoid
As an investor, you’re probably always on the lookout for a great deal. But while you’re looking elsewhere for an opportunity, you may be missing important factors closer to home. Sometimes there are great deals right under your nose. Those may simply be mistakes that you can avoid that can help you generate more money or save money on your investments. Here are four investing mistakes to avoid at all costs.
1. Overpaying on Taxes
Paying taxes is part of investing. If you’re going to invest in real estate, you need to pay your taxes. However, that doesn’t mean you always have to pay the maximum taxes on every transaction you complete. The most successful business people in the world often pay the least amount of taxes, relatively speaking. That’s because they know that are a lot of legal tax breaks offered by the IRS to reduce taxes.
For example, if you buy and sell multiple properties for profit, you could be overpaying on taxes. Every time you sell a property you incur capital gains, which comes with one of the highest tax rates. While it’s smart to buy low and sell high, that capital gains tax really eats into your profits. You may be overpaying on your taxes unless you take advantage of the 1031 exchange program that the IRS offers. With this program, as long as you buy and sell real estate within the parameters mandated by the tax code, you can delay paying capital gains taxes indefinitely. Refer to the the tax code or your tax professional for more details about the 1031 exchange.
Another way that you could be overpaying on your taxes is by not taking all your deductions. As a landlord or real estate investor, you’re entitled to a slew of deductions that reduce your taxes. These deductions are also very helpful for offsetting taxes owed on income from your day job. One of the most common real estate investing mistakes is to be too cautious about taking tax deductions. As long as you have intent to follow the tax code and have receipts to back up any deductions you claim, you’re probably safe. Of course, you want to be sure you avoid another of the most common real estate investing mistakes, which is coming up next in our list.
2. Not Using a Tax Professional
This is probably the biggest investing mistake to avoid, no matter what kind of investing you’re into. The tax code is so big that it takes several volumes of books just to publish it. It’s also fairly dynamic. There are changes to the tax code that go into effect practically every year. It’s a full-time job to keep up with all the changes, but it shouldn’t be your full-time job. That’s why you need to use a tax professional if you’re an investor. A tax professional can make sure that you’re filing correctly, but they also make sure you’re taking advantage of every single deduction that you’re legally entitled to. They also help to make sure you aren’t taking deductions that you aren’tlegally entitled to. In other words, a tax professional helps to keep you out of hot water with the IRS.
In addition, when you use a tax professional, you can get tax advice all year long; not just at tax time. So for instance if you’re looking at doing some rehab work on a property and you want to know what the difference in your tax liability would be if you do the repair work before the end of the year or after the first, you could have your tax professional run the numbers for you. That’s a huge benefit that can potentially save you thousands of dollars over the course of a year. To recap, here are the most valuable advantages you get from using a tax professional:
- Year-round consulting expertise
- Maximum tax deductions
- Checks and balances on transactions
- Accuracy of tax returns oversight
- Support in the event of a tax audit
Now, just going out and hiring a tax accountant isn’t really enough to protect your interests as an investor. Read on to find out another mistake to avoid.
3. Hiring the Wrong Kind of Tax Professional
There are tax professionals and there are tax professionals. What you want as an investor is a tax professional who understands your business. In other words, sitting down with a tax “professional” at a Walmart pop up stand isn’t what you should be doing. These bargain tax preparation schemes may get your tax return filed, but they certainly won’t be able to service your complex tax needs as an investor. Just as you wouldn’t hire an estate planning lawyer to defend you in a civil suit, you don’t want to hire just any accountant to be your tax professional. You need to find a tax professional with lots of experience working with real estate investors. That’s the kind of lawyer who will understand things like the 1031 exchange. If you ever find yourself working with a tax professional who’s asking youquestions about how the 1013 exchange works, it’s time to find a new tax professional. There’s another powerful tax savings strategy that investors should be consulting with their tax professionals about. That’s coming up next on our list.
4. Not Self-Directing Your Retirement Account
If you have an IRA or a 401k, chances are your employer or the plan sponsor is making your investment decisions for you. That’s fine if you’re one of the millions of people who don’t have the time, interest or ability to manage your retirement account. For many people, it’s fine to just let the financial “gurus” make decisions about where to invest your money. Not for real estate investors. If you’re a real estate investor, you’re missing out big time on one of the greatest inventions in retirement planning; self-directed retirement accounts.
Did you know you can use your IRA or 401k to invest in your real estate deals? But only if you self-direct. The IRS allows you to take the money from your retirement account, invest it in your own real estate deals and then take the money back into your retirement account, either tax-free or tax-deferred. That’s a potent tax strategy that your tax professional should be able to help you navigate. It’s also a smart way to find money to invest in your real estate deals. If you’re a real estate investor, you should strongly consider self-directing your retirement account.
These are four of the most common investing mistakes to avoid. Unfortunately, millions of investors are probably making these mistakes right now. It doesn’t have to be you. Starting right now, make sure that your investment business isn’t falling prey to poor tax decisions, failing to use the 1031 exchange or a competent, experienced tax professional or not self-directing your retirement account. If you would like more information about the 1031 exchange or real estate investments that would meet your self-directed retirement account needs, please contact us today.