4 Investing Mistakes to Avoid Before the End of the Year
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John Larson back with the Real Estate Cowboys and some more great investment information and knowledge. This week we are going to be discussing four investing mistakes to avoid. The majority of these mistakes have to do with taxes. We’re coming up on the end of the year here. Tax season is about to start in January. So I wanted to give some good, useful information on some investing mistakes to look out for specifically regarding taxes. Because as you know, even with small businesses, not keeping up on your taxes and things of that nature or overpaying on your taxes, whatever it may be or not paying your taxes, in general, can result in you going out of business. And so you have to look at your single-family rentals or your private money lending opportunities or whatever it may be, as little small businesses also. And so you want to make sure that you’re keeping up on your taxes, make sure that you’re paying the right amount, not overpaying, so on and so forth.
So you know, as an investor, you’re probably always on the lookout for a great deal, right? That, that’s me. But while you’re looking elsewhere for an opportunity, you may be missing important factors closer to home. Okay. And 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. And so here are four investing mistakes to avoid at all costs. Number one is going to be overpaying on taxes. Paying taxes is a very important part of investing. If you’re going to invest in real estate, you need to pay your taxes, property taxes, taxes on income, so on and so forth. Very important. Like I said, just like any other small business, you know, this doesn’t mean though that 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. And as you know, with real estate investing, there’s so many write-offs available to you. We talk about those a lot on the show. You need to know that there are legal tax breaks offered by the IRS to reduce taxes, especially when it comes to real estate, right? Well, 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, the capital gains, that difference, the tax from that really eats into your profits. So you may be overpaying on your taxes unless you take advantage of a 1031 exchange program offered by the IRS, which would be to within the program, as long as you buy and sell real estate within the parameters mandated by the tax code, you can delay paying capital gains tax indefinitely. So I know a lot of successful investors take advantage of the 1031 exchange. Refer to the tax code or your tax professional for more details on the 1031 exchange. This isn’t a show about the 1031. I’ll have a professional come on the show here soon that we’ll talk about a 1031 exchange as we near closer to tax season. Definitely want to take advantage of that if you can.
Another way you could be overpaying on taxes is by not taking all of your deductions. So there’s many deductions available to you as a landlord. 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 the intent to follow the tax code and have receipts, receipts to back up any deductions you claim, you’re safe.
Of course, you want to make sure you avoid another one of the most common real estate investing mistakes which is coming up next on our list and that would be not using a tax professional. If you are in business or if you own investments, you definitely want to make sure you have a good tax professional that you’re using that’s making sure that you’re not overpaying on taxes and that you’re taking advantage of all of the tax benefits that are available to you, all the write-offs that are available to you. If you’re not, then you’re really not taking full advantage of the opportunities that are available to you by being a real estate investor and owning property and being a landlord. Because really the way that the tax code is written up, it really protects the landlord in terms of offering a lot of tax savings that are not available to other investment opportunities, which is one of the main reasons why investing in real estate and owning real estate is one of the most, is probably the most popular investment option in the world. And if you think of all the successful people in America and worldwide, I guarantee all of them invest in real estate in some form, but not using a tax professional really is probably the biggest investing mistake to avoid, no matter what kind of investment you’re going into. The tax code is so big that it takes several volumes of books just to publish it. It’s also fairly dynamic. So there are changes to the tax code that go into effect. Practically every year there’s changes to the tax code.
So it’s a full-time job to keep up with all the changes, but it shouldn’t be your full-time job. We don’t have time to do this. Um, if we’re investing full time, you know that there are so many different things. You’ve pulled in so many different areas and depending on the day, right? If you’re an active real estate investor, if you’re a passive real estate investor, still there’s things to do. There’s still things to account for. You know you don’t want to have to be keeping up with the changes in the tax code on a yearly basis. Some people really like doing that. That’s not my thing. I hire a professional to handle that for me. It makes my life and my investments a little bit more passive. A tax professional can really 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 make sure you aren’t taking deductions that you’re not legally entitled to. Right? So in other words, a tax professional helps you keep out of the hot water with the IRS. Right? Which is very important. You don’t want problems with the IRS. In addition, when you use a tax professional, you can get tax advice all year long, not just at tax time, which is good. It’s always good to be able to, when you know, one of my good friends that I grew up with as a tax professional, so I’m able to call him whenever for advice or guidance on what I should do with certain investments or if I have any tax questions. So I’m already prepared for any issues that could arise. So definitely make sure you have somebody in your speed dial right, on your cell that you can contact at any time with any questions or concerns regarding taxes.
Here’s an example. For instance, if you’re looking at doing some rehab work on a property and you want to know the difference in your tax liability, what the difference would be if you do the repair work before the end of the year. If you do it first of the year, you can have your tax professional run these numbers for you, right? That’s a great question. Should I do this? Should I invest this money now for the rehab work? Should I wait do it the first of the year? Right? Your tax professional should be able to give you some good advice on that. That’s a huge benefit that can potentially save you thousands of dollars over the course of a year. So to recap, here are the most valuable advantages you get from using a tax professional. So you get year-round consulting. You are taking advantage of the maximum tax deductions available to you. Tax professionals can check and balance on certain transactions, accuracy of tax returns, oversight, and support in the event of a tax audit, which we all want to avoid. But building that rapport with a tax professional will be really, really good for you in case something like that was to arise.
Now just going out and hiring a tax accountant isn’t really enough to protect your interest as an investor. So here’s another mistake that I would avoid and that would be hiring the wrong kind of tax professional. There are tax professionals and then there are tax professionals, right? What you want as an investor is a tax professional who understands your business. Someone that’s worked with real estate, someone that knows all of the opportunities that are available to you; the deductions, so on and so forth, someone with experience in that type of investment in business, right?
And so like Tom Wheelwright’s a great guy. Like I would definitely buy his books and watch videos on him. You can go on YouTube and see him speaking. Tom Wheelwright knows the ins and outs that are available to you when it comes to taking advantage of tax benefits resulting from real estate investing. Okay. And he brushes shoulders with guys like Robert Kiyosaki and the real estate guys and Keith Weinhold from Get Rich Education. And so you know, he’s very, very knowledgeable when it comes to this, which is why he speaks at these events that I go to frequently. I feel like every time I go and see him I learn something new. It’s not like the same speech every time. It’s like he’s constantly picking up on new opportunities because the tax code is being rewritten or added to or amended every year, it seems like, right? So Tom keeps up with that sort of stuff and finds different avenues for real estate investors where you can take advantage of tax savings. So definitely stay up to snuff regarding tax benefits or any changes to the tax code that that affects you as a real estate investor; whether it benefits you or maybe it hinders you into an upcoming year. You just need to know there’s some things to avoid or some things to take advantage of.
Certainly sitting down with a tax professional at like, let’s say a Walmart pop-up stand isn’t what you should be doing. Bargain tax preparation schemes may get your taxes tax return filed, but it’s certainly not going to be a service that helps you with your complex real estate transactions that you do each year. Right? That’s not who you want to go to to help you with tax advice when it comes to filing your taxes and making sure that you know you’re taking advantage of all the tax benefits and write-offs that are available to you. And it’s the same thing. You wouldn’t hire a real estate planning attorney to defend you in a civil suit and you don’t want to hire just any accountant to be your tax professional. You definitely need to find a tax professional with a lots of experience working with real estate investors. So what’s a good way to do that or find a tax professional? You know, reach out to other investors that you may know, ask who they use. You could do a Google search and kind of just like call different tax professionals and almost put them through like a little bit of an interview, ask them what their background is, expertise, so on and so forth. How long have they been doing it? Or you can go out to web forums, Bigger Pockets, you know, ask others who they use, who they’re happy with, who’s been really good to work with in terms of, you know, saving them the most money possible on taxes and just getting some referrals that way. That’s what I would recommend. It’s the same type of thing, you know, it’s the same for a lawyer who will understand things like a 1031 exchange. If you ever find yourself working with a tax professional who’s asking you questions about how a 1031 exchange works, it’s time to find a new tax professional, right? Accountant, CPA, whatever it may be.
There’s another powerful tax-saving strategy that investors should be consulting with their tax professionals about. And that would be my next mistake, which would be not self-directing your retirement account or at least a portion of it. So if you have an IRA or a 401k, chances are your employer or plan sponsor is making your investment decisions for you. And that’s fine if you’re one of the millions of people who don’t have the time or interest or the ability to manage your retirement account. For many people, it’s fine to just let these quote-unquote financial gurus make decisions about where to invest your money.
That’s not the mindset of a real estate investor. If you’re a real estate investor you’re missing out big time on one of the greatest inventions in retirement planning. And that’s a self-directed account, which you can go buy property with that money or you could invest in things like private money lending and have those dividends or monthly cashflow go back into your account tax-free or tax-deferred. Also, if you sell your property out of an IRA, a self-directed IRA, those capital gains that come back into your IRA would also be tax-free or tax-deferred. Okay, so there’s a lot of benefit in buying property from a self-directed account or doing private lending from a self-directed account. So I think that’s a major mistake if all of your money is tied into wall street and not bringing it Main street within your retirement account, that’s a huge mistake in my opinion.
You can use your IRA or 401k to invest in real estate deals, but only if you self-direct. So you need to do that, right? That’s when alternative investments are opened up to your retirement portfolio. 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, as I said, tax-free or tax-deferred. And that’s a potent tax strategy that your tax professionals should be able to help you navigate. And it’s also very smart 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.
And these are four of the most common investment mistakes to avoid. I think, unfortunately, millions of investors are probably making these mistakes right now. It’s just like any small business, some of the biggest ways that your business will fail, have to do with taxes and not, you know, accounting for your taxes properly and not taking advantage of write-offs and not paying your taxes and letting that stuff accrue and overtime and just you get into a situation where you, you’ll never be able to pay them off, right?
So that’s when a business all of a sudden fails. This doesn’t have to be you. You know, starting right now make sure that your investment business isn’t falling prey to poor tax decisions. Failing to use the 1031 exchange or using a competent, experienced tax professional or not self-directing your IRA or 401k. That doesn’t have to be you. Let’s, uh, let’s start working at, you know, self-directing some funds, looking at some alternative investments where you can start to see double-digit or even triple-digit returns. You know, if you’re buying property at the right time, selling at the right time, you can see seriously triple-digit returns on these investments if you do it the right way. If you’d like more information about a 1031 exchange or real estate investments or private money lending, feel free to contact us, AREIUSA.com, RealEstateCowboysDFW.com put in your information, a member of our team will reach out.
We do have people that we work with that are 1031 exchange professionals. We do have some tax professionals that we would recommend, so if you have any questions about that, just go to our websites AREIUSA.com, RealEstateCowboysDFW.com put your information in and like I said, a member of our team will reach out pretty much immediately and give you some advice on some possible tax professionals or a 1031 exchange professional. We can put you in touch with some people that we worked with before that have had a good experience. Or if you’re interested in some of the passive investments that we have available right now. It’s coming up towards the end of the year. You want to get that money moving. You want to start putting that in some investments. We have some great opportunities for you. So just reach out to us on our websites. It’s the best way to get in touch with someone on our team. But that’s it for this week. This is John Larson signing off. I’ll be back next week with some more great content, but in the meantime, everyone have a great week and always remember, what’s your return on life.