Investing

How to Pay Less in Taxes: Strategies for Investors (Video)

As experienced investors, we always seek ways to enhance our gains and reduce our outlays. By leveraging certain strategies, such as self-directed IRAs and investing in businesses and real estate through retirement accounts, we can gain the upper hand when it comes to minimizing our taxes. This article and attached video will reveal little-known methods used by only 4% of investors.

You'll discover how understanding self-directed IRAs and investing in businesses and real estate through retirement accounts can significantly reduce your taxable income. We will also discuss regaining control over your money, IRA, 401k, and retirement plan.

The top one percent have mastered building wealth without paying hefty taxes; you can also learn these techniques. For instance, utilizing Roth IRAs for tax-free growth is a strategy that many overlook when planning their tax year.

Whether setting up a Solo K for your business or exploring passive investment opportunities in various money vehicles, this guide aims to help you navigate these complex avenues with ease so that come next tax season, you know exactly how to pay less in taxes.

https://www.youtube.com/watch?v=tWIV_qO3-jk&t=1401s

Unlock the Secrets of Elite Investors

Don't settle for ordinary investment strategies when you can join the exclusive club of savvy investors who know how to make their money work harder. Only 4% of investors are using unconventional methods, and they are taking control of their finances and achieving greater wealth.

Take Charge with Self-Directed IRAs

Why limit yourself to stocks and bonds when you can have the freedom to invest in alternative assets? Self-directed IRAs provide you with increased autonomy in your investment choices, allowing for the diversification of assets through private companies and real estate. You will reap significant financial benefits with careful planning and due diligence.

Invest in the Future with Private Businesses and Real Estate

Looking for even more opportunities to grow your wealth? Self-directed IRAs allow you to invest directly in private businesses or purchase real estate properties.

Imagine being a part of a promising startup or earning rental income from a property in your retirement portfolio. You can even earn money flipping houses or raising money via real estate syndication. Just be sure to consult with experienced professionals to navigate the complex IRS rules surrounding prohibited transactions.

Regain Control Over Your Money, IRA, 401k, and Retirement

Don't let banks and investment firms control your financial assets. Take back the reins and invest on your own terms.

Identify Who Controls Your Financial Assets

Is a financial institution making decisions on your behalf? It's time to understand who's in charge and take control.

Handing off power might appear to be a smart move, but you could be missing out on chances for gain. Don't let rigid frameworks limit your potential for growth.

Strategies for Taking Back Control

• Self-Directed IRAs: Invest in non-traditional assets like real estate or private businesses for more flexibility than traditional retirement accounts.
• Solo 401(k): Maximize your tax-advantaged savings with higher contribution limits, ideal for business owners.
• Infinite Banking Concept: Become your own banker by using whole life insurance policies as personal banking systems. Finance investments while still earning interest on the full amount of the policy's cash value. Learn more about infinite banking here.

Take charge of where and how your money is invested for greater potential growth and diversification beyond traditional markets. Build wealth and reduce taxes owed along the way.

Building Wealth Without Paying Taxes Like The Top 1%

The wealthy have a secret to amass wealth without paying taxes: Roth IRAs. These financial instruments offer tax-free growth and withdrawals in retirement, making them a powerful tool for building wealth.

Utilizing Roth IRAs for Tax-Free Growth

A Roth IRA is an individual retirement account that grows tax-free. Unlike traditional IRAs, you pay taxes upfront on contributions, but any earnings or gains from investments within the account remain tax-free when withdrawn during retirement.

For those expecting to be in a higher income bracket at retirement than when they contributed, the Roth IRA offers an attractive tax-saving strategy by locking in today's lower rates and avoiding potential future increases. It allows you to lock in today's lower tax rates and avoid potential future increases.

Case Study - Peter Thiel's $5 Billion Roth IRA

Peter Thiel's $5 billion Roth IRA is a prime example of this approach in action. By investing early in companies like PayPal and Facebook through his self-directed Roth IRA, Thiel enjoyed exponential returns completely free from taxation.

By using financial tools like Roth IRAs strategically, you can build substantial wealth over time while minimizing your exposure to taxes. Take the same path as the wealthy and commence constructing your tax-exempt wealth now. Learn about more ways the rich avoid paying taxes.

Get More Control Over Your Retirement Savings with a Solo K

As an entrepreneur, you can aim to safeguard your economic future and lessen the amount of taxes paid. A Solo 401k, also known as a Solo-k, can help you achieve both goals. This individual retirement account offers unique benefits that regular IRAs or 401ks don't provide.

Steps to Set Up Your Solo K

Setting up a Solo 401k may seem daunting, but it's achievable with some guidance and planning. Here are the key steps:

1. Check Eligibility: Make sure you have self-employment income and no full-time employees other than yourself or your spouse.
2. Select a Provider: Choose an IRA custodian who provides self-directed options like Horizon Trust.
3. File Necessary Paperwork: File IRS Form 5500-EZ once your plan assets exceed $250K.
4. Make Contributions: You can contribute both as an employer and employee, significantly increasing the amount you can save tax-deferred each year compared to traditional IRAs or 401ks.

There are several nuances related to contribution limits based on age and income levels that need careful consideration while setting up this powerful financial tool. It's recommended to consult with professionals experienced in dealing with self-directed IRAs.

By leveraging the power of a Solo-k for your business operations, you gain more control over where and how much money is invested toward securing future financial stability. You also create potential opportunities for reducing taxable income, keeping more profits within the company rather than paying them out as taxes.

Invest Your Way with Self-Directed Funds

Freedom to invest your way? Yes, please. Self-directed funds offer just that, but most Americans don't know about this option.

Benefits & Risks of Self-Direction

Self-directed IRAs provide flexibility that traditional retirement accounts can't match. Instead of being limited to stocks, bonds, or mutual funds, self-directed IRAs offer the opportunity to invest in various asset classes, such as real estate, precious metals, and private businesses.

• Tax Advantages: Self-directed IRAs offer tax-deferred growth on investments, meaning you won't pay taxes until withdrawal during retirement, when your income (and tax rate) will likely be lower.
• Diversification: With a wider range of investment options, self-directed accounts allow for greater diversification, potentially reducing risk and increasing returns over time.
• Total Control: Investors have complete authority over their accounts, deciding where and how their money should be invested without needing approval from SDIRA custodians like Horizon Trust.

But be aware of the risks, such as lack of liquidity with longer-term investments like real estate and potential loss if investments don't perform well. Do your research and plan carefully before venturing into this realm.

Infinite Banking Concept - Be Your Own Banker

Want to control your finances, interest rates, and loan terms? The Infinite Banking Concept (IBC) lets you become your own banker. It's a financial strategy that's not well-known but offers a unique approach to managing your wealth.

The mechanics of infinite banking

IBC involves setting up a dividend-paying whole life insurance policy. Once it accumulates cash value, you can borrow against it for various purposes like investing in real estate or funding business ventures. The best part? You get to set the repayment terms since you're borrowing from yourself.

Becoming your own banker means having total control over your money without relying on traditional banks or lending institutions. It also means potentially reducing taxation on profits earned from investments made using borrowed funds.

But, this method requires discipline and careful planning. If loans aren't repaid according to agreed-upon terms, there could be negative implications for both the policy's cash value and the death benefit amount available upon passing away.

• Flexibility: You decide when and how much money you want to borrow against your policy's cash value.
• Tax benefits: Any dividends received through the whole life insurance policy are generally tax-free.
• Liquidity: These policies build up cash values over time, which can be accessed at any point during your lifetime without penalties, unlike 401k plans, where early withdrawals may result in hefty fines.

To implement IBC effectively, you need to understand complex financial concepts and work with knowledgeable professionals who specialize in this area.

Horizon Trust offers guidance on establishing appropriate structures that align with individual goals while ensuring compliance with all relevant regulations and minimizing potential risks associated with self-directed investment strategies.

Passive Investing: A Low-Stress Way to Make Money

Want to make money without the hassle of constant oversight? Passive investing might be for you. It frees up time for other ventures while generating steady income streams.

What is Passive Investing?

Passive investing is an investment strategy that maximizes returns by minimizing buying and selling. Instead of trying to beat the market through active trading, passive investors buy assets and hold them for extended periods.

This strategy relies on the idea that markets are generally efficient in pricing securities over time. Thus, it's more beneficial to ride out short-term price fluctuations rather than attempting to profit from them.

Passive investing typically involves buying index funds or ETFs in order to replicate the performance of a benchmark such as the S&P 500 or Dow Jones Industrial Average.

Other Passive Investment Opportunities

Looking beyond stocks, there are numerous other asset classes available for passive investment:

• Real Estate: Consider real estate crowdfunding platforms or REITs for consistent cash flow through rental income and appreciation in value over time.
• Bonds: Bonds offer fixed interest payments over a specified period until they mature when you receive back your initial investment.
• Precious Metals and Commodities: Assets like gold, silver, oil, or agricultural commodities can serve as hedges against inflation and add further diversification to your portfolio.

Remember to understand each asset class and how it fits into your overall financial goals before deciding where to allocate capital within these various money vehicles.

Take control of your finances and pay less in taxes by using self-directed IRAs and investing in real estate and businesses through retirement accounts.

Maximize tax-free growth by utilizing Roth IRAs and set up a solo K for your business to reduce tax liability.

Don't forget about passive investment opportunities to build wealth without excessive taxes.

By understanding these options, you can make informed decisions to achieve your financial goals while minimizing your tax burden.

FAQs: How to Pay Less in Taxes

How to Legally Reduce Your Tax Liability

Invest in tax-sheltered accounts like self-directed IRAs, claim eligible deductions, and leverage income-splitting techniques to reduce your tax liability.

Who Bears the Larger Tax Burden: Rich or Poor?

In the U.S., higher-income individuals typically bear a larger portion of the total tax burden, but effective rates may vary based on individual circumstances and tax planning strategies.

Claiming 1 or 0: Which is Better?

If you want more take-home pay each paycheck, claim 1, but if you'd rather have a larger refund at tax time, claim 0. It's about balancing immediate cash flow against potential future refunds.

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by Greg Herlean

Your Guide to Self-Directed IRA Real Estate Investing

A self-directed IRA (SDIRA) offers unique tax advantages that aren't available with traditional retirement plans.

One of the main reasons I swear by self-directed IRAs is because it allows me to invest in real estate, while taking advantage of the tax benefits of an IRA.

As a real estate investor myself, I’ve been able to generate millions in tax-free revenue from various real estate holdings using my tax-protected Roth IRA.

However, self-directed IRAs receive more regulations than most retirement plans and do have some limitations, also known as prohibited transactions.

That’s why I want to share some insights on self-directed IRA real estate investments based on what has worked and not worked for me in the past.

The Basics of a Real Estate IRA

Using your self-directed IRA to invest in real estate is one of the many advantages of converting from a 401(k) or traditional IRA to an SDIRA.

Your SDIRA can be used to purchase the following real assets:

• Single-family homes
• Multi Family homes
• Raw land
• REITs
• Commercial real estate
• Mortgage notes

In addition, SDIRAs can be used to fund non-recourse loans and private equity in mortgage companies that generate lots of revenue.

In short, there is no shortage of ways to invest in real estate using an SDIRA.

Investments can be used to generate passive income on rental properties or to buy and hold equity in a fast-rising market.

All income earned by the property is also directed back to the IRA and is held tax-free if you use a Roth-structured IRA.

However, before we continue, we should note that there are several regulations that govern self-directed IRA real estate investments that many people are unaware of before they open an account.

Real Estate IRA Rules and Regulations

First, all SDIRAs require a custodian, which comes with added fees and time constraints. Custodial interference can be circumvented by achieving checkbook control via an LLC, which I recommend opening through your SDIRA to fund all purchases.

An SDIRA also provides liability benefits, especially if you partner or syndicate a real estate deal.

Secondly, an SDIRA can only be used to buy and sell property in your account—not property you already own.

Third, in order to avoid tax penalties, the IRA owner must avoid a long list of what the IRS deems prohibited transactions.

• You cannot reside in a property owned through your SDIRA.
• All handiwork must be contracted out. You cannot work on the property by hand.
• Your immediate family members, including your spouse, parents, children, grandchildren, and legally adopted children, as well as the spouses of your children and grandchildren, are prohibited from renting or residing in any property owned by your SDIRA account. This restriction also applies to investment providers or fiduciaries of your IRA.

These added caveats do tend to turn some investors off, but these cons are greatly overshadowed by the tax benefits of combining a Roth IRA with an LLC to generate high returns for retirement. Let’s explore some of these pros and cons below.

Pros and Cons of Using an SDIRA to Purchase Real Estate

Pros

• Potential for a high return on investment.
• Checkbook control enables greater control over assets.
• Greater investment diversification shields assets from the stock market.
• Real estate investments grow tax-deferred or tax-free.
• You can use an SDIRA to invest in properties almost anywhere.
• Self-directed IRA LLCs are protected from creditors and bankruptcy.
• All costs come out of the account instead of your pocket.

Cons

• You cannot dwell in the property.
• Income isn't pocketed until you cash out.
• It's necessary to have plenty of cash in your account to cover all costs associated with the property.
• Real estate is not a traditionally liquid investment.
• No DIY improvements allowed.
• Everything is paid to the IRA account instead of the investor.
• Unlike a traditional property investment, a real estate IRA requires third-party involvement in the form of an IRA custodian, though this can largely be bypassed with checkbook control.
• No tax advantages are available for deducting mortgage interest, property taxes, or depreciation.
• Potential for negative cash flow, problematic tenants, or major repairs.

How to Fund a Real Estate IRA

Now that we have the basics out of the way, it’s time to explore ways to fund your account.

There are several funding options for real estate IRAs. Many investors choose to transfer funds from an existing IRA or SDIRA. It's also possible to roll funds over from an employer-sponsored 401(k) into a new real estate IRA.

Investors can also make annual contributions within the IRS's contribution limits, which is $6,500 for people under 50, with a $1,000 catch-up rate allowed for people 50 or over.

How to Begin Investing in Real Estate With an IRA

First, you will need to open a self-directed IRA that will be used for investing in real estate through a brokerage. All real estate IRAs require an IRA custodian, so conduct your due diligence in finding the right one.

After you open an account and fund it, you will need lots of money for purchases and repairs. I recommend establishing an LLC.

LLCs come with liability protection against bankruptcy, and they allow you to exercise checkbook control, which cuts out the middleman of going through your custodian to make a purchase. Since real estate deals are notoriously tedious, this saves you lots of time.

If an IRA has sufficient funds to purchase a property, a cash sale can be made. If the account doesn't have sufficient funds, the investor has several options for closing the gap, which include:

• Partnering funds with other investors. In this scenario, profits, expenses, and ownership are divided based on investor contributions.
• Acquiring a non-resources loan. Note: Non-recourse loans allow the lender to foreclose on real estate used as collateral in the case of default.

Investors can also purchase mortgage notes instead of physical real estate as a low-commitment option. This option makes it possible to earn money from borrowers instead of being a landlord.

Keep in mind that a real estate IRA transaction follows all of the same steps of any traditional property sale. Once escrow is closed, the investor is free to rent or lease the property to anyone who isn't classified as a disqualified person.

An SDIRA makes it possible to buy real estate that can be used to generate income and value while avoiding taxes.

By following the simple steps outlined above and keeping yourself apprised of all of the latest IRS regulations, you can begin buying and holding real estate in your retirement portfolio so that when you retire, you will have substantially more money baked into equity and generated from passive income.

FAQs

What is the 5-year rule on the self-directed IRA?

Applied specifically to Roth SDIRAs, the 5-year rule requires investors to own an IRA account for a period of 5 years before taking penalty-free and tax-free distributions. Otherwise, the account holder will be responsible and must pay a penalty.

How do you avoid taxes on an SDIRA?

If you'd like to avoid paying taxes at the rate of ordinary income during the withdrawal period, opt for a Roth SDIRA that is funded with post-tax dollars instead of pre-tax dollars.

Do you pay capital gains on an SDIRA?

With earnings on an SDIRA having tax-deferred status, capital gains and dividends will pile up until the withdrawal period after age 59 1/2. Once withdrawals begin, the earnings will be subject to capital gains taxes at the rate of ordinary income. However, Roth IRA accounts are not subject to capital gains during the withdrawal period.

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by Greg Herlean

Your Investment Guide to Retirement Early | How to Build Wealth Fast

The feeling of financial independence isn't something you can tally up using retirement calculators. It's also not something you can achieve on a whim. While the average American's retirement age is 61, your lifestyle, both leading up to and during retirement, will determine your true feasible retirement age. 

To help you retire early, I’ve laid out a few investment secrets I’ve learned over the years that allow you to scale your wealth quickly and sustainably for retirement. 

Step 1. Determine How Early You Want to Retire

First, determine what early retirement looks like to you. Do you want to retire in your 60s, 50s, or maybe even your 40s?

For some people, the idea of freely traveling, relaxing, or pursuing hobbies is all the motivation they need to aggressively save during their working years. 

Setting an "end date" is necessary because you have to work backwards from the age you want to retire to the age you are today to work out your investing strategy. 

Step 2. Calculate How Much Savings You'll Need for Retirement

Determine the "monthly nut" you'll need to sustain your standard of living during retirement. Your nut can consist of housing, utilities, transportation, groceries, and anything else you pay for that allows you to "exist."

An easy way to do this is to create a monthly average by looking at your monthly spending for the past six months. While some people think that coming up with a flat sum for their full retirement is the way to budget for retirement, it's actually important to calculate your way forward based on monthly expenses to create an annual retirement need. 

From there, you can see how much money you'll need to cover your anticipated retirement duration. 

Ideally, your monthly spend will not include a mortgage payment. The hard rule of retiring early is that your mortgage and other debts should be paid off by your retirement date. If your home has significant value, selling the home to purchase a smaller property for cash could be part of your plan for early retirement. 

Generally, it's recommended that you create a situation where you're living on 80% of your pre-retirement income to enjoy a similar standard of living. The less monthly costs you can avoid, the earlier you’ll be able to retire. 

For people retiring early, it's necessary to rely on your own investments and savings until Social Security payments can begin at age 62. If you can hold off until 70 before cashing in, you'll get the full benefits. 

Step 3. Start Saving Money

Even the smallest expense burden you can cut today brings you an hour closer to retiring. If you're doing retirement planning as someone who isn't a millionaire, there's no shame in "going cheap" for the sake of your end goal. Here are some ways to start cutting costs to get to the retirement finish line earlier than your peers:

• Aggressively pursue promotions and "job leaps" that will max out your earning potential as quickly as possible.
• Choose one streaming service that you like. Cancel all other subscriptions.
• Pay off or refinance high-interest debt.
• Open a short-term certificate of deposit (CD) for cash that isn't already being invested.
• Invest in the annual family vacation fund instead of taking multiple vacations.

While this will help to build a nest egg, there's only so much that cutting costs can do for your retirement plans. It's just as important to grow money in anticipation of retirement. 

Step 4. Grow and Compound Your Money

Open a retirement account to start putting your retirement funds to work early. Receiving a matching 401(K) is a good place to start, though I recommend opening a self-directed IRA (SDIRA).

An SDIRA allows you to invest your IRA in alternative assets like real estate and crypto, which can grow in equity or accrue monthly mortgage payments to fund your retirement. There are several ways to raise money for real estate using your SDIRA that will allow you to compound your earnings without going broke.

If you're over age 50, take advantage of the IRS's catch-up contributions for retirement investing. Other growth and compounding options that are simple enough for the average person without a financial and investment background to use include:

• High-yield savings accounts.
• Certificates of deposit (CDs).
• Bonds or bond funds.
• Money market accounts (MMAs).
• Real estate investment trusts (REITs).
• Dividend-paying stocks.

Step 5. Reduce Debt and Expenses

Pay off all debts before retirement to limit your monthly spending. If your final mortgage payment falls beyond the date you want to retire, consider refinancing to a 15-year mortgage if you're in a position to make larger payments now in exchange for a mortgage-free retirement. 

I still recommend investing your money before paying off debt, though aggressively paying off your debt early will allow you to avoid interest payments. 

Step 6. Avoid Taxes

Many people lose a big portion of the money they've scrimped and saved for their entire working lives to taxes during retirement. If there is one secret the wealthy know that everyone else doesn’t, it’s how to avoid taxes. 

If real estate is your investment of choice for funding your retirement, make sure you're taking advantage of the 1031 exchange to jump from property to property without ever paying for capital gains on your earnings. 

A Roth-structured SDIRA is another great option to avoid getting hit by taxes. With this option, all of your income and gains will flow right back into your IRA on a tax-free basis. That means you're constantly building wealth without paying taxes on it until the day you need to take a distribution. Just remember to follow the IRS’s SDIRA rules.

Step 7. Budget for Healthcare and Other Expenses

The time from when you walk away from employer-sponsored insurance to when Medicare kicks in at age 65 is a long road. While it may seem like going without insurance can reduce your monthly nut, the truth is that one health emergency can leave you bankrupt in retirement.

A retirement health savings account (HSA) is one of the best ways to put aside money for care during retirement because it allows you to tuck away pre-tax dollars. If you've been carrying life insurance, consider swapping it for long-term care insurance once your policy terms are up.

The secret to retiring early is that nobody ever really stops working. That's because managing your investments and finances will remain a priority for the rest of your life. If you feel the nudge to get out of the rat race early, the first step is working with a financial advisor to start planning a realistic retirement budget.

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by Greg

11 Ways Wealthy People Avoid Taxes

One of the most common questions I get asked is: how do rich people avoid taxes without getting in trouble? 

It’s all too common to see headlines of rich celebrities and corporations that pay close to $0 in taxes. Recently revealed IRS files found that wealthy individuals like Jeff Bezos and George Soros have paid $0 in taxes over the years. 

However, the truth is that these individuals are able to do this through completely legal means available to any investor. 

While you may not have a team of attorneys and accountants working on your side, educating yourself on common tax loopholes and laws will help tremendously. 

Rethink your tax bill strategy with these 11 ways to avoid paying taxes like the rich. 

1. Invest in a Tax-Deferred Retirement Account

Capital gains taxes for assets can be as high as 20% depending on how long you held it and how high it was worth. 

One way to circumvent these taxes is to hold your asset for longer to qualify for a smaller capital gains tax. 

However, you can avoid most capital gains taxes altogether by growing your portfolio tax-free with an individual retirement account. 

IRAs offer many of the same tax benefits as a 401(k), except Roth IRAs can be managed almost tax-free. For example, all contributions to a Roth IRA are not taxable, and earnings can be withdrawn tax-free as long as they are within the required retirement window. 

Furthermore, a self-directed IRA under a Roth structure allows you to invest in alternative assets like real estate and crypto without being taxed. 

Other retirement accounts you might be interested in include:

• SEP IRA: Recommended for self-employed individuals.
• SIMPLE IRA: Recommended for small businesses.

Just be sure to research self-directed IRA IRS rules to maximize the benefit of your account. 

2. Depreciation

While many people are familiar with capital gains taxes, capital losses actually work in reverse–a process known as depreciation. 

You don't need to do anything special to benefit from depreciation. Under the IRS tax code, your assets automatically depreciate if you sell an asset at a loss. 

The simple depreciation formula requires subtracting the asset's salvage value before dividing the asset's cost by the estimated number of years of useful life. 

The asset's salvage value is the total it's estimated to be worth at the conclusion of its useful life. The number you get at the end is your depreciation expense.

Another method called double-declining depreciation allows you to bulk up your write-off of an asset's value right after its purchase in exchange for declining deductions as time passes. 

This is a good option for a small business that's struggling under the weight of startup expenses. The formula uses two times the number you get when you multiply your asset's single-line depreciation rate by its book value at the start of the year.

3. Charitable Donations

Claiming charitable donations on your tax return helps reduce your taxable income for the year. 

Both cash and material donations can be tax deductible as long as the recipient is a 503(c)(3) charitable organization. So plan your donations wisely. 

For example, if you anticipate being in a higher tax bracket this year, plan a larger charitable gift carefully to minimize your tax burden without exceeding the limit. If a donation is more than 60% of your income for the year, the excess amount will be rolled over for tax benefits for the next year.

For many, donating to charity is a great way to put the money they would have paid in taxes to better use. 

Remember, keep your receipts. 

4. Long-term Investment Income

As previously mentioned, the long-term capital gains tax is substantially lower than the short-term tax. 

While the short-term capital gains rate is between 10% and 37%, long-term capital gains are tiered at 0%, 15%, or 20% for people in different income and filing brackets. 

All it takes is holding on to an asset for a whole year before you sell. 

5. Tap Into Tax Breaks in Real Estate or Similar Industries

Every industry has its own set of "secret" tax breaks. 

In real estate, 1031 exchanges allow you to continuously raise money for real estate using the sale of your previous property without paying taxes on it. 

Let's also not forget about write-offs for property taxes, property insurance, repair costs, advertising, office space, legal fees, accounting fees, travel, and so much more. Wealthy Americans never leave these breaks and incentives on the table.

6. Step-up Basis

A need-to-know option if you're inheriting assets, the step-up basis loophole allows you to avoid capital gains taxes on inherited property. 

When a person inherits property or assets, the IRS resets the asset's original cost basis to its value on the inheritance date. 

While the heir will pay capital gains on that basis when selling the asset, the overall rate will be lower.

7. Gifting

Did you know that giving money to family members can lower your tax burden?

According to the IRS, a gift is not considered income for federal tax purposes unless it exceeds the annual exclusion of $17,000. 

As of 2023, the IRS allows you to give away $12.92 million in gifts cumulatively over the course of your life without ever paying gift taxes. 

Just be warned that the gift tax rate climbs to somewhere between 18% and 40% if you exceed the $17,000 cap in a single year.

8. Moving

While millionaires and billionaires hang out in the priciest zip codes in the country, they know better than to claim their wealthiest dwelling as their primary residence. 

If you currently live in a high-tax state, moving your primary residence to a home in a low-cost state can instantly boost your net worth. 

Changing tax residency is a complex process that usually requires the help of a tax expert. The biggest thing to remember is to never spend 183 days or more in a state other than the one you've claimed for your primary residence. 

9. Forming an LLC

An LLC helps you avoid double taxation the same way that the wealthy do. 

When you form an LLC, you'll enjoy the structure of a pass-through entity that allows earnings to go directly to you without prior taxation. That means you're only paying taxes on your personal income. 

LLC owners also enjoy tax deductions for business expenses, the Qualified Business Income deduction, and other perks that self-employed people don't get without an LLC.

10. Establishing Trusts

Establishing a trust can help you to reduce taxes in the context of a wealth transfer.

The first thing to know about this strategy is that trusts reach the highest federal income tax rates at lower thresholds compared to ordinary income. That’s why proper trust management is everything. 

The trick to using a trust to reduce your tax burden is to make distributions to a trust beneficiary only if that beneficiary is in a lower tax bracket. 

11. Understanding the Tax Code

This is probably the most important aspect of how wealthy people avoid paying taxes. 

You don't need to know all the tax laws to lower your tax rate, but it pays to know about the laws that relate to your investment decisions. 

Make sure to research various deductions and employ some of these tactics before the new tax year to lower your tax burden. 

Wealthy people don't just get lucky with taxes. They use existing tax codes to their advantage to keep more of their money without breaking the law. 

One of the best-kept secrets in personal finance is that many of the tax-deferral options available to millionaires are available to people making minimum wage, six figures, and everything in between. 

Experiment with some of these methods to try and lower your tax burden. Remember to talk to a financial advisor first.

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by Greg

How to Use Real Estate Syndication to Build Wealth

There's power in numbers when investing in real estate. That’s why one of my favorite investments is through real estate syndication. 

Real estate syndication brings a group of investors together to pool their money to purchase a revenue-generating property. You don't have to be a millionaire to participate in real estate syndications, and it’s a great way to raise capital for real estate investments.

Thanks to the JOBS act passed in 2012, investors can now crowdfund real estate deals to earn passive income. 

Here's a glance at what you need to know about real estate syndication deals. 

How Real Estate Syndication Works

Prior to real estate syndications, single investors were forced to take on the full burden of funding the purchase of a property. Investors were also forced to manage every detail of property ownership. The income earned was anything but passive. 

While most people were simply locked out of investing in real estate due the cost and time required, the ones capable of funding investments had to put in full-time "landlord" hours just to keep a property profitable. 

However, real estate syndications allow you or your real estate LLC to pool your money with hundreds of other investors to invest in high-value real estate assets. While investing in a simple single-family home would be a bridge too far for most people, syndications make it easy to hold partial ownership in a high-value apartment building in a hot market. 

Once the property is purchased, it is managed by the syndicator responsible for originating the deal. That means that an investor isn't forced to deal with tenant issues, and profits and losses are distributed among the investors. 

The Real Estate Syndicator

Investment opportunities offered by a real estate syndication are initiated by a real estate syndicator. Also known as a sponsor, a syndicator is responsible for bringing the deal to life. 

Think of the syndicator as the general partner in the business arrangement. Here's a rundown of everything the syndicator handles in a typical deal:

• Arranging the financing for purchasing a property.
• Negotiating prices and terms with the seller.
• Building a business plan.
• Attracting investors.
• Raising capital.
• Hiring a team to manage the property.
• Managing investor relations.
• Handling all tax and financial reporting.

In many ways, an investment is only as good as the syndicator behind it.

A syndicator should be a real estate expert with experience in investing. 

They make everything happen by applying their experience and familiarity with real estate to handling underwriting, making deals, and performing due diligence on behalf of the investors pooling money into a deal. 

The Investor

The investor is an individual who decides to invest in the real estate deal being offered by the syndicator. You can think of an investor as a limited partner in the deal. 

As an owner of a percentage of the property, the investor gets all of the general benefits of property ownership without the administrative burdens that accompany owning property.

Syndicators may take a larger cut due to their active role in deals, but investors have far less liability.  

Benefits and Drawbacks of Real Estate Syndications

Benefits

• Grow your real estate portfolio without investing large amounts of time, money, and research toward each investment.
• Gain greater buying power by pooling money with other investors.
• Access real estate in hot markets outside of your financial reach.
• Offset gains with “paper losses” to reduce your tax burden. 
• Invest passively (investor) without the headache of property management. 
• Generate a high return on investment.
• Gain knowledgeable advice on lucrative deals from trusted syndicators. 
• Real estate syndication is available in a real estate IRA via self-directed investing. 

Drawbacks

• Syndication deals have very specific investor requirements (must be an accredited investor).
• Deals may be geographically limited. 
• Deals may take a long time to develop and actualize. 
• Investors have limited control over property management. 

In many ways, syndications are similar to real estate investment trusts (REITs). However, many investors prefer syndications over REITs because syndications allow investors to choose the properties they want to invest in instead of being forced to go in blindly. 

Eligibility Requirements

Eligibility is where real estate syndications begin to look different from other crowdfunded real estate options. While many investing platforms allow anyone with a few hundred dollars in their pocket to get in on deals, syndications come with very specific investor requirements. 

A person must be an accredited investor to participate in a real estate syndication. 

An accredited investor is defined as someone with an annual income of at least $200,000, a combined spousal income of $300,000, or a net worth of at least $1 million. 

How to Start Investing in Real Estate Syndication

Real estate syndication all starts with finding the right syndicator. 

It's important to look for a competent, experienced syndicator with a history of finding revenue-generating properties. 

A syndicator should also bring experience in property management, a successful track record with previous investments, and knowledge of real estate deals.

Real Estate Syndication Tips

• Don't rush into anything. 
• Conduct your due diligence.
• Becoming familiar with the portfolio of a syndicator you are considering. 
• Be ready for the long-haul–most syndicators hold a property for five to seven years before seeking buyers willing to purchase the property at a higher price. 

Real estate syndication can be a very high-risk, high-reward proposition.

If you are eligible for real estate syndication, I would strongly recommend considering it as an investment option for your portfolio.

Real estate syndication provides a great opportunity to earn high returns or to ramp up your retirement portfolio using a self-directed IRA. 

Quick Q&A Recap

1. Who Can Invest in Real Estate Syndications?

Unlike REITs, real estate syndications are generally only open to accredited investors. People who qualify as accredited investors are wise to take advantage of syndications instead of using crowdfunding platforms that allow anyone to invest because syndications provide access to high-value residential and commercial real estate. 

2. How Many People Can Participate in a Real Estate Syndication?

A real estate syndication technically only needs to have two investors. However, many have several hundred. 

3. What Are the Tax Benefits of Real Estate Syndications? Investors in real estate syndications can enjoy tax deductions, deferred income taxes, and lower tax rates. As a syndication investor, you also enjoy the benefits of depreciation for potentially paying capital gains taxes at lower rates. In addition, the 1031 exchange tax rule that allows you to defer capital gains taxes if you swap one property for another can apply to syndication investors.

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by Greg

Top IRA Real Estate Investment Strategies for Massive Wealth

Can you use your IRA to buy real estate? It’s a question worth asking as you eye up different investment strategies for retirement. 

To answer the question, not only can you invest in real estate with an IRA, but it could provide massive tax benefits that help compound gains in your portfolio. 

To get started, you’ll need to open a self-directed IRA, which is an IRA that allows for alternative investments. Self-directed IRAs can be structured like a Roth or traditional IRA, allowing you to compound those earnings tax-free until withdrawal–if you choose. 

However, there are several self-directed IRA rules limiting what you can purchase. Nevertheless, many investors still have lots of freedom to invest in multiple types of real estate that go beyond the restrictions imposed by traditional IRA custodians.

To help you get started with your real estate IRA investments, I’ve outlined a few ways to purchase real estate using your IRA. 

Five Strategies to Purchase Real Estate With an IRA

 1. Directed Purchase

The simplest way to purchase real estate is by using cash in your SDIRA account. If your account holds sufficient funds, you can purchase a property directly. Otherwise, you will need to pursue other options. 

Like a 1031 exchange, a direct purchase with an SDIRA is one of many tax-free investments you can use to build massive wealth. 

2. Start an LLC

Opening an LLC allows you to acquire complete checkbook control over your SDIRA funds to purchase and move real estate. Unlike direct purchases, which require custodial support, opening an LLC allows you to access funds directly without the support of your custodian, so you gain full control over your investment funds. 

To open an LLC, you’ll need to register it with all of the standard agencies required for incorporation in your state. A passive custodian is then used to transfer funds from the IRA owner to a new IRA LLC bank account.

Once opened, the LLC owner can exercise checkbook control over any investment they want. 

Additionally, LLCs offer investors additional tax incentives by helping them avoid direct federal taxes, so they are taxed at a lower rate. 

3. Partner Your IRA

Only some people seeking to generate wealth through IRA real estate investments have the cash available to purchase a property. Additionally, it can be difficult to raise capital for real estate. 

Fortunately, you can use your self-directed IRA to partner with additional investors to purchase a property. 

While we often call this partnering your IRA, the official term for this strategy is "purchasing an undivided interest" in a property. Once you've combined your self-directed IRA funds with partner funds, your IRA owns a percentage of the property that's proportionate to your funding contribution. 

In addition, your IRA is responsible for its portion of all property expenses. That same portion applies when proceeds are divided following the sale of the investment.

This approach is a great way to dip your toes in the real estate pool without taking on too much debt or risk. 

4. Invest in Mortgage Notes

What if you want to avoid using your IRA funds to manage a property you own physically? 

Fortunately, mortgage notes offer a passive alternative to traditional real estate investment. 

A mortgage note is a vehicle used to extend credit. Notes are used to back a loan and noteholders by charging interest. 

Portions of mortgages can also be purchased and sold through IRAs. Under this setup, your retirement account will hold an undivided interest in the portion of the note owned as a way to generate income.

5. Use Your IRA for a Non-recourse Loan

A non-recourse loan is another option for someone lacking the full funds to invest in real estate. This type of loan is secured in the name of your IRA using the property being purchased as collateral. 

Unlike personal loans, the IRA holder's personal assets are used as collateral. So a lender can only legally seize the IRA asset being financed.

Alternative Ways to Invest in Real Estate With Retirement Funds

If these traditional strategies require too much upfront capital or don’t suit your interests, there are several additional ways to leverage an IRA to invest in real estate. 

1. Become a Home Wholesaler

It's possible to use self-directed funds to put properties under contract from distressed sellers using your IRA. When you resell the contract as a wholesaler, the money from the buyer can be transferred directly to your IRA at closing. 

When done properly, a down payment ranging from just $100 to $1,000 can easily become $10,000.

2. Purchase Tax Liens

IRAs can be used to invest in tax liens that combine low capital, little responsibility for the investor, and generous returns. Tax liens are imposed on properties for delinquent taxes. 

When investors purchase liens from counties, they will make money in one of two ways. In the first case, the investor earns interest when a lien is redeemed. Secondly, if the taxes are never paid, the deed to the property is given to the investor.

3. Invest in REITs

Many people are surprised to learn that a REIT (real estate investment trust) is one of the investments permitted with a standard Roth IRA. REITs are publicly traded companies that own and manage income-producing properties on behalf of investors. The list of property types commonly offered through REITs includes:

• Homes.
• Apartment complexes.
• Offices.
• Warehouses.
• Retail centers.
• Medical offices.
• Storage complexes.
• Data centers.
• Hotels.
• Cell towers.

Investors favor REITs for their ability to pay out consistent dividends. In fact, IRS regulations dictate that REITs must pay out 90% or more of taxable profits to shareholders. While REIT dividends paid out to individuals are taxed as ordinary income, dividends paid out to IRAs enjoy tax benefits.

4. Form a Joint Venture With a Contractor

Self-directed IRAs can be used to invest in joint ventures. When designing a real estate joint venture, you can enter into an agreement with a contractor to pool resources to build or rehab properties. 

What makes a joint venture different from a partnership is that a joint venture is only intended to operate for a specific period. It's understood that both parties intend to sell for profit within that time frame, making them easy to enter and leave.

5. Bird Dog With an Experienced Broker

If your goal is to purchase a property through your IRA, there's no doubt that coming up with full funding using your IRA alone is a challenge. This is why many IRA-minded property investors like the "bird dog" technique, using brokers to help them find distressed, underpriced properties. 

While the broker takes a fee in exchange for leads, investors often find this the best way to scoop up bottom-of-the-barrel properties that can be turned into gems.

6. Purchase Options and Flip Raw Land, Farms, Vacant Lots, and Storage Units

IRAs can absolutely be used to fund "flip homes." Using a self-directed IRA, you can purchase homes in need of repairs for the purpose of either generating rental revenue or selling. 

However, it's important to be aware that the IRS has some pretty strict rules in place regarding who can perform work on an "IRA flip" property due to the disqualified person rule.

7. Sell Options on Existing Homes in Your IRA

Once you've added a property to your IRA, you can capitalize on that property by selling real estate options. Many investors are attracted to real estate options today because traditional real estate investment channels have become "crowded." 

With a real estate option, you're creating a contract that allows the buyer to purchase your property at a set price within a specific period of time in exchange for an option premium. If the buyer declines the purchase at the end of the contract period, you can move forward with another buyer with your premium in tow.

Using an IRA to invest in real estate is a great strategy for staying partially insulated against the stock market. Using the strategies above, investors can combine the tax benefits of IRAs with the growth of real estate to build massive wealth.

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by Greg

Self-Directed IRA Rules, Assets, and Prohibited Transactions

Uncertain market conditions can make even the best investors question their retirement decisions. While there are many flashy investments for retirement planning, the best types of investments are proven ones. 

While a traditional IRA provides offers a proven portfolio of investments with steady long-term growth, sometimes investors want an extra cushion against inflation or something more stable. Unfortunately, traditional and Roth IRAs provide little investment opportunity when it comes to real estate, precious metals, or other investments that beat out inflation.

One retirement plan I recommend to all of my customers and readers is a self-directed IRA. Owning a self-directed IRA allows you to invest in alternative assets, such as cryptocurrency, real estate, and gold. But, most importantly, with the right self-directed IRA custodian, you will have free reign to choose which assets you want to invest with.

To learn more about self-directed IRAs, let’s explore all of the rules and regulations surrounding them. 

What is a Self-Directed IRA?

A self-directed individual retirement account (SDIRA) allows investors to invest in alternative investments for their retirement. And, unlike traditional or Roth IRAs, SDIRAs are usually offered through custodians instead of brokerage firms. 

While a self-directed IRA comes with the same IRA contribution limits and tax-advantage basis as both the traditional IRA and Roth IRA, it has different asset rules. We'll cover what these "alternative" assets encompass in a bit. But, first, take a look at the rules of operating a self-directed IRA. 

Self-Directed IRA Rules

Disqualified Persons

Transactions are tightly controlled with self-directed IRAs. While your IRA is intended to fund your lifestyle after retirement, it's not intended to start benefiting you before retirement. That's why any transaction that might be interpreted as "providing immediate financial gain" is prohibited. 

The disqualified-person rule doesn't just apply to the IRA holder; it can also include:

• Your spouse.
• Your children.
• Your parents.
• Your employer.
• Any financial advisor, fiduciary, administrator, or custodian providing IRA-related services.
• Any business entities you own at least 50% of on either a direct or indirect basis.
• Any business entity that is influenced by a disqualified person.

The list of prohibited transactions includes:

• Transferring IRA plan income to a disqualified person
• Transferring plan assets to a disqualified person
• Extending IRA credit to a disqualified person
• Providing goods or services to a disqualified person. 

Things get murky when determining who counts as a disqualified person if you run lots of transactions using your self-directed IRA. One classic example of a violation would be hiring your own son or daughters to build a deck on a rental apartment that your self-directed IRA owns. Seeking legal guidance to separate disqualified persons from your self-directed IRA is advised.

Disallowable Assets

The restrictions on self-directed IRAs also don't stop at "who" can participate in plan-related transactions. The rules also restrict "which" assets you can invest in and, while there's no official list of approved investments for self-directed IRAs, the rules are pretty clear regarding what's prohibited. For example, here's a list of disallowable assets in an SDIRA:

• Collectibles: This includes gemstones, art, coins, and other valuables with intrinsic, historic, or novelty value. However, some United States and foreign coins with 99.9% purity are allowable if the IRA custodian has physical possession of them.
• Life Insurance: IRAs are prohibited from investing in whole life, universal, and term life insurance policies. If these investments are attractive, consider a 401(k) plan.
• S-Corporations Stock: S-Corporation shareholder restrictions prevent them from allowing IRAs as shareholders.

Certain actions are also prohibited when you're handling assets that are allowed with a self-directed IRA. When operating a self-directed IRA, you are prohibited from borrowing money from the IRA, selling or leasing property to the IRA, or taking payment for managing a property held by the IRA. In addition, all income earned from an IRA must be returned to the IRA.

Personal Benefit

The personal benefit rule reiterates everything we discussed above. Essentially, an SDIRA cannot be used for personal gain that circumvents tax law. For example, no income derived from an SDIRA can be used for a personal savings or checking account. 

Taxes

The tax-deferred benefit of a self-directed IRA means that you do not have to pay taxes on any interest and gains earned through your IRA until you withdraw funds. What's more, contributions made to any IRA can entitle the account holder to tax deductions. 

Unfortunately, violating any of the rules of the SDIRA will nullify your account’s tax advantage. In many cases, this could mean that your account will lose all tax benefits and pay full taxes on any contributions and withdrawals. 

Contribution Limits

Finally, it’s important to understand how much you can contribute to an SDIRA before signing up for one. The 2022 contribution limit for self-directed IRAs for people under age 50 is $6,000. The limit bumps up to $7,000 for people over age 50. This is a per-person limit instead of a per-account limit. 

Self-Directed IRA Alternative Assets

Now, that we have a good understanding of what’s allowed and not allowed in an SDIRA, let’s explore a list of assets you can invest in:

• Cryptocurrency.
• Crypto staking.
• Real estate.
• REITs.
• Startup companies.
• Crowdfunded assets.
• Undeveloped/raw land.
• Promissory notes.
• Tax lien certificates.
• Gold, silver, and other precious metals.
• Water rights.
• Mineral rights.
• LLC membership interest.
• Livestock.
• Commodities.
• Private stock.
• Private equity.

Self-directed IRAs open doors to assets that are prohibited by most of the other retirement investment plan options. For example, the ability to raise capital for real estate using an SDIRA allows you to invest your retirement account in single-family homes, multi-family homes, commercial properties, mobile homes, and more. 

What's more, account holders have a unique opportunity to "invest with their conscience" by investing in socially responsible and sustainable investments that they pick by hand. 

Are There Any Cons to an SDIRA?

Like all IRAs, the self-directed IRA requires you to take required minimum distributions beginning at age 72 to avoid steep penalties. However, taking distributions with a self-directed IRA that is tied up with illiquid assets can sometimes prove to be more complex without professional assistance. 

In addition, self-directed IRAs tend to have a higher annual fee compared to other options, although this depends largely on the custodian.

Is a Self-Directed IRA Right for Me?

The big advantage of a self-directed IRA is the ability to access alternative assets with higher growth potential than standard IRA investments. For this reason, a self-directed IRA is attractive for anyone seeking to avoid the daily turmoil and volatility that comes with the stock market. 

One detail that often gets overlooked when discussing the diversification of self-directed IRAs is that account holders can also continue to invest in traditional investments that are permitted by other types of IRAs.

So even if you just want to extend your retirement portfolio to stocks and precious metals, an SDIRA helps you out. If you're looking for more investment advice, be sure to browse my site for educational resources. For those interested in opening an SDIRA, visit Horizon Trust to speak to a custodian about opening an account. Horizon Trust offers low fees, friendly service, a state-of-the-art investment dashboard, and easy guidance to help you open an account and invest in what you want quickly.

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by Greg

How to Form a Real Estate LLC: Benefits and Costs 

Is it a good idea to form a real estate limited liability company LLC after buying a property? 

After raising capital for real estate, it’s often recommended to protect your investment by forming a real estate limited liability company (LLC). 

A real estate LLC offers extraordinary benefits for a real estate business. But does that mean it’s the right choice for your setup? Here's what you need to know before you sign on the dotted line. 

Pros and Cons of a Real Estate LLC

The LLC structure is a natural fit for a property investor because it offers easy entry with plenty of room to grow without changing structures. Like any business structure, an LLC offers both benefits and drawbacks for real estate investors. 

Let's start with some of the pros and cons of forming an LLC for real estate. 

Real Estate LLC Pros:

• Protection of Personal Assets: While a real estate investment that's a rental property can lead to tidy profits, being an investor also exposes your personal assets to risk unless you have liability protection. Forming an LLC limits exposure to personal lawsuits because it shifts legal responsibility from the investor to the real estate business.
• Pass-Through Taxation: This is one of the biggest LLC advantages for business owners because it prevents double taxation. In addition to offering protection against personal legal liability, LLCs also offer protection against double taxation by exempting businesses from paying taxes as "entities." Instead, income is passed to business owners in the form of personal income tax based on their share of the business.
• Easy Management: Unlike corporations, LLCs can be managed by either third-party operators or direct owners. Officers and directors are not required.
• Lower Fees: State-level fees for LLCs tend to be much lower compared to fees imposed on corporations.
• Flexible Ownership Rules: An LLC can legally have anywhere from one member to an unlimited number of members.
• Easy Ownership Transfers: LLC ownership can be easily transferred from person to person. This is helpful when conducting savvy investments, such as purchasing real estate with delinquent taxes. 
• Safety in Numbers: Real estate investors are permitted to create a new LLC for each rental property they own as a way to shield the entire portfolio from claims made against a single property.
• Flexible Cash Flow Distribution: Unlike other business structures, an LLC isn't required to be in proportion during cash flow distribution. That means that high performers can be financially rewarded without conflict.

Real Estate LLC Cons:

• Annual Fees: While LLCs are extremely cheap to maintain, owners will still need to pay filing fees to keep their LLCs active in most states.
• Potential Self-Employment Tax: Could you get saddled with self-employment tax for a real estate LLC? It's possible. The workaround is to register as an S corporation with the IRS for tax purposes while staying registered as an LLC at the state level.
• Properties in Different States Can't Share an LLC: If you're investing across multiple states, you'll need to set up individual LLCs for each property. While this isn't a big deal, it does mean paying fees for establishing and maintaining every LLC.
• LLCs Can Be Subject to Lawsuits: LLCs are not legally impenetrable. While LLCs provide strong protection against personality liability, there are situations where individual members can be held responsible if fraud or negligence can be proven.
• Complications When Changing Members: There are several layers to this downside. The first is that transferring a rental property into an LLC could trigger a "due on sale" clause requiring a mortgage to be paid off when property ownership changes. There's also a potential for city, county, or state taxes to kick in when property ownership changes.

Overall, the downsides of forming a real estate LLC don’t outweigh the benefits. In many cases, proper planning can help investors avoid unexpected fees.

Real Estate LLC vs. Liability Insurance

A real estate LLC and liability insurance are not interchangeable. An LLC is a business structure that offers built-in protections against personal liability. Liability insurance is a policy that helps cover the cost of injuries, property damage, and other types of claims. 

Investors who own multifamily properties, commercial properties, or industrial properties should strongly consider having both LLC protection and liability insurance because a higher number of tenants means greater liability exposure. In general, all property owners should consider doubling up. However, landlords owning a single-family rental may be safe choosing one option.

Steps to Form a Real Estate LLC

1. Perform Due Diligence

It's important to research state-specific regulations for forming a real estate LLC. Each LLC must be formed in the state where the property is located. This is true even if you live in a different state.

In most cases, filing is handled by the secretary of state for your state.

While having experience with forming an LLC in one state may help the process along, you should expect different rules for each state. Therefore, consider consulting with a lawyer in the state where you're forming a new LLC.

2. Choose a Business Name

Feel free to bring a little creativity into this step. The LLC name designates your company as a legal entity. While every LLC must have a name, the name doesn't have to align with your name, your brand name, or any other category. Some states require LLCs to include the "LLC" designation in the name.

3. Submit Articles of Incorporation

While every state has its own rules, articles of incorporation are typically short. Expect about a page worth of documentation for this one. The general rundown for articles of incorporation includes:

• The name of your LLC.
• The address of your LLC.
• A brief description of your LLC's purpose.
• The "effective date" for your LLC.
• The name and address of the registered agent.
• The signature of the person filing the articles.

The person filing the LLC articles doesn't need to be the owner. In many cases, the filer is the owner's lawyer. However, some states require the names and addresses of all LLC members to be listed within the articles of incorporation. 

4. Create an Operating Agreement

An operating agreement is a core document used by LLCs to outline plans for financial and functional decisions, rules, and regulations. According to the U.S. Small Business Administration (SBA), its purpose is to govern the business's internal operations in a way that suits the specific needs of the business owners. The three purposes of the operating agreement are:

• Protecting LLC status.
• Clarifying verbal agreements between members.
• Protecting agreements in the eyes of the state.

The SBA recommends that operating agreements touch on ownership percentages among members, voting rights and responsibilities, powers and duties of members and managers, distribution of profits and losses, meeting schedules, and buyout/buy-sell rules. Specificity is important. Operating agreements can ultimately settle disputes among members. 

5. Obtain Proper Permits and Licenses

Most small businesses need licenses and permits from both federal and state agencies. The most universal requirement is a state business license. In addition to obtaining permits and licenses, business owners must keep all credentials current through renewals. 

Forming a real estate LLC provides unmatched protection against personal liability. While the LLC shield isn't fully impenetrable, it prevents personal assets from being touched in ordinary cases that don't involve provable fraud or negligence. 

While anyone starting a business should investigate all structure options before forming an LLC, the LLC is almost universally the best option when seeking tax benefits and personal liability protection for a rental property.

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by Greg

Are REITs a Good Investment? How About in Economic Downturns?

Real estate investment trusts (REITs) offer an affordable way to invest in real estate without lots of capital. 

In addition, REIT dividends can feel like a shelter in a storm because they offer consistency as an inflation investment. However, anyone considering this option should do their due diligence before they invest in real estate. 

This begs the question, are REITs a good investment? To answer this question, let’s take a look at the pros and cons of REITs, different investment options, and their outlook in the current economic climate. 

What Are REITs?

REITs are an investment option that allows you to invest in real estate without the need to purchase a property on your own. 

REITs own and operate income-producing commercial and residential properties. 

Common REIT properties include apartment buildings, office buildings, warehouses, malls, hotels, and storage facilities. So while you're not collecting monthly rent the way you would if you happened to be the sole owner, you are getting regular dividend yields with the perk of not having to take a hands-on approach to the day-to-day management or operations of the property. 

You essentially own a stake in a property in the same way you own a stake in a business when you invest in S&P 500 companies in the stock market. However, since most REITs consist of a bundled set of properties, they’re more similar to index funds or other basket goods. 

Investing in a REIT isn't the same thing as just investing in commercial real estate as part of a group. REITs are required to meet certain standards that are determined by Congress and the IRS. A legitimate and legal REIT must meet the following qualifications: 

• Must invest at least 75% of total assets.
• Must return a minimum of 90% of taxable income in the form of shareholder dividends annually. Consider this a big perk for your earning potential.
• Must receive at least 75% of gross income from real estate properties in the form of rents, mortgage interest, or sales.
• Must claim a minimum of 100 shareholders following a full year of existence.
• Must not have more than 50% of shares held by less than five investors during the second half of the tax year.

While some REITs are labeled as equity REITs that function as "landlords," others are simply mortgage REITs that collect monthly payments from tenants after acquiring existing mortgages. Of course, finding a hybrid REIT that does both is possible. 

The perk of qualifying for a REIT is that true REITs aren't required to pay taxes at the actual corporate tax level. As a result, they are in a better position to finance real estate than other individuals or investment companies. What that means for you as an investor is that a REIT's payout can grow to create larger and larger dividends over time.

Pros and Cons of REITs

REITs and small-time investors can be a match made in heaven during a downturn because investors enjoy a decent amount of insulation from volatile exchange traded funds. After all, people will always need a place to live. So let's dive into the pros and cons to get the full picture. 

REIT Pros:

• REITs allow you to diversify away from being dependent on bonds and stocks.
• REITs offer high dividend yields due to the rule that REITs must pay at least 90% of taxable income to shareholders.
• REITs allow you to diversify your investments geographically. That means you can invest in real estate in specific markets with stronger performance compared to the nation as a whole.
• REITs offer a hands-off way to benefit from real estate investments. In addition, the personal risk is much lower than trying to flip, lease, or manage properties on your own.
• REITs create a historically high-performing asset class. In fact, the three-year average for total returns on REITs between November 2017 and November 2020 was 11.25%. That beat the S&P 500's 9.07% for the same period.
• REITs are pretty liquid. While unloading your own property might be a hassle, you can buy or sell REITs online quickly online using a brokerage account.
• REITs offer power in numbers. For many people, a REIT is the only way to get access to class A office buildings as investments.

REIT Cons:

• Rising interest rates can sometimes reduce the value of a REIT.
• Dividends are typically taxed at your normal income rate. Of course, you'll want to chat with a CPA to maximize your tax options.
• REITs can ebb and flow with commerce trends. While you may be riding high when spaces for cupcake shops are in demand, value can fall once the fad fades.
• Some REITs charge high management fees. Do your homework!
• While REITs can be great in the long term for steady and robust dividends, this isn't a good option if you're looking for dramatic short-term returns.

Who Can Invest in REITs?

Anyone can invest in a REIT. However, the bottom line isn't so crisp. This is where it becomes necessary to talk about how much is needed to invest, how much you need to be worth, and the different types of REITs available to you.

How Much Money Do You Need to Invest in a REIT?

REITs often require minimum investments ranging from $1,000 to $25,000. Most private and non-traded REITs are only open to elite accredited investors with a net worth of $1 million. For non-millionaires, the requirement is typically two to five years of annual income between $200,000 and $300,000.

Are REITs Safer Than Stocks?

It's hard to get a consensus on this. A combination of expense and lack of safety margin on stocks can make them intimidating for smaller investors. On the other hand, many people think that REITs are safer than stocks during times of inflation and uncertainty because they: 

• Are resilient.
• Have low debt.
• Can potentially provide protection against inflation because rents rise with inflation. In addition, debt that is used to finance properties can be "inflated away" while property values rise.
• Tend to have very reasonable valuations that bring stability.
• Have been known to outperform stocks in times of rising rates.

The bottom line is that REITs aren't intended to replace your investments in stock exchanges. Instead, they are there to round out, enhance, and diversify your portfolio. While REITs can definitely have high returns, they carry some risks that aren't seen with other investment options. For instance, you may have your REIT dividends taxed as ordinary income instead of enjoying the dividend or capital gains taxes that go with stocks.

Types of REITs

The main REIT categories are the equity, mortgage, and hybrid options covered above. However, REITs are also classified by how investors buy and hold shares. 

The first option is a publicly-traded REIT with shares listed on a national security exchange. Publicly traded REITs are regulated by the U.S. Securities and Exchange Commission (SEC). Next, public non-traded REITs are registered with the SEC without being traded on national securities exchanges. Finally, private REITs are non-regulated REITs that sell shares to investors without being traded on national securities exchanges.

Which REIT Is Best for Me?

First, it's important to know that financial advisors can help you determine which REITs to invest in the same way they can help you to choose which stocks vs. crypto to buy. 

First-time investors are more likely to feel comfortable with publicly traded REITs because they offer the stability, transparency, regulation, and liquidity to help you find your way around this investment niche. However, it's important to know that you can get caught up in fraudulent REITs when you choose private real estate companies.

Concluding Thoughts: Are REITs a Good Investment?

REITs are worth looking into if you want a little extra protection during a potential downturn. A REIT can be a great way to get cash flow from a property without putting in any elbow grease. However, REITs should be seen as vehicles to balance stocks instead of "investment hacks" for abandoning stocks.

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by Greg

Three Hot Crypto Staking Misconceptions: Is It Worth It?

Is there anything more misunderstood than crypto? It's hard to find the balance between "the hype" and "the dismissals." 

Embracing digital assets doesn't need to be an all-or-nothing investing choice. Anyone who invests in cryptocurrencies has a wide range of options for earning passive income using a combination of classic stocks and commodities investments while also embracing the blockchain network. 

One particular area of interest for investors is the idea of crypto staking. While investing in cryptocurrency doesn’t involve any interest or derivatives, crypto staking allows investors to earn interest by staking their crypto on an exchange. 

In this article, we’ll discuss what crypto staking is, the benefits, and some misconceptions about staking crypto. 

What Is Crypto Staking?

Staking cryptocurrency is the process of verifying transactions on a blockchain by using coins held in a wallet or exchange to forge new blocks. Essentially, when you stake coins in your wallet or exchange, the blockchain ledger uses these coins to authenticate or verify new transactions and form new blocks. 

These blocks comprise the open ledger of the blockchain network and allow for various processes, such as trading to occur.

As an investor, crypto staking is essentially the same thing as holding cash in a savings account. Since banks don’t hold all of their capital in vaults, they need to draw cash from elsewhere for withdrawals, such as your savings. The reward for keeping your money in a bank is the interest earned for your holdings. 

Similarly, blockchain staking rewards users who hold their coins in a verified wallet or exchange them with interest.

Crypostaking is a purely passive investment, with most of the legwork being performed upfront as due diligence. With generally higher yields, crypto staking makes investing in crypto vs. stocks favor crypto. 

What Are the Benefits of Crypto Staking?

Staking allows you to benefit from your digital assets by earning rewards without selling them. Most people compare staking to placing crypto in the digital equivalent of a high-yield savings account. 

Staking is a great way for investors to get in without the barrier to entry created by the large minimal investment needed to become a full validator. 

The main benefit of staking is that you can reasonably expect to earn 10% to 20% more crypto per year when using crypto on a proof of stake network. 

There are generally two types of staking, which we will discuss below. 

What’s the Difference Between Proof of Work and Proof of Stake?

• Proof of Work (POW). POW is an algorithm used by Bitcoin, Ethereum, and other major cryptos to secure cryptocurrencies by validating transactions and mining tokens. 
• Proof of Stake (POS). POS is an alternative to POW that enables cryptocurrency owners to stake their coins to get permission to check and add new blocks. 

POS has been eclipsing POW because it is a more energy-efficient process. You'll need to use a cryptocurrency that uses the POS model if you want to participate in staking. 

Misconception 1: The Bubble on Crypto Staking Will Burst Any Minute

Bubble talk comes from the fact that many people presume that the extreme rise of crypto means that it's all some kind of fluke or scam. 

A true bubble means that an asset sees a rapid rise in market value during a brief time window, even though there's been no fundamental change to account for the rise in value. This essentially means that the cost of an asset greatly exceeds its intrinsic value to the point that the price isn't aligned with the asset's fundamentals. 

Yes, some smaller coins have shown some "bubble" characteristics due to rapid price escalations paired with pump-and-dump hype strategies. 

However, established cryptocurrencies have more than proven their intrinsic value while avoiding the volatility of smaller coins. One of the big value points of something like Bitcoin is that it is used for various transactions both at point-of-sale locations and online for a low cost. 

Furthermore, Bitcoin's widespread adoption as a global medium of exchange has made it a strong store of value that many people compare to gold. However, with countries adopting Bitcoin as a pegged currency and early adopters hailing it as the future of money, Bitcoin’s price is difficult to discern. 

For this reason, there exists the real potential for Bitcoin to go even higher and plenty of opportunities in staking your Bitcoin.

Misconception 2: Staking Coins Doesn't Have Any Drawbacks

Before investing, it’s important to know about the potential downsides. Keep these things in mind:

• Some projects have minimum staking requirements that require you to lock away a minimum holding to get rewards. While this is not usually a problem, there's a potential for big losses if you lock away more than you can afford.
• Staking requires a lock-up period that prohibits your crypto from being transferred for a specific period. That means no trading staked tokens if prices shift. As a result, a large drop in a newly staked asset could eat up interest.
• While high staking rewards may be appealing, some staking assets are awarded on a delayed basis instead of providing daily payouts. This is important because rates of return on staking rewards are subject to change because they aren't guaranteed.
• There are often "unstaking waiting periods" that can last more than a week.

Further, crypto networks can go bust just like any other type of business. Make sure you're doing your homework on a network that's enticing you with generous platform offers and staking rewards to avoid losing all of your staked coins.

Misconception 3: Gains Made From Cryptocurrency Staking Are Not Taxed

Yes, you need to report cryptocurrency activity on your tax returns. This is because the IRS actually classifies cryptocurrency as property. As a result, all cryptocurrency transactions are taxed as property transactions and come with a capital gains tax. 

Generally, your long-term gains will be taxed at a rate of 0%, 15%, or 20% based on your income and filing status.

Is Crypto Staking Worth It?

While some people still parrot the idea that crypto is some type of scam, I think that the widespread embracing of crypto by institutions worldwide disproves these claims pretty clearly. 

Crypto investing can be a great way to diversify your portfolio, especially if you have a self-directed IRA. However, unlike traditional crypto holdings, staking allows you to make money on your crypto while it sits in your wallet. 

The key here is to do your due diligence, especially when it comes to finding the right coin and exchanges to stake your coins. 

My takeaway? Everyone serious about investing and fascinated by cryptocurrency should give staking a chance to see if it fits with their investing strategy.

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by Greg