“Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most tax-efficient manner possible.”
Note: Tax planning is not the same as tax evasion or fraud, its not immoral and not unethical.
Now that we talked about what TP is and what its not lets talk about what it can mean for Real Estate Investors.
As an example suppose you buy a property and want to decide if you will rent it out long term or resell it for a profit right away. One deciding factor will be the knowledge that passive income and capitol gains are taxed at different rates. By considering the consequences of each you are effectively Planning your tax strategy or “Tax Planning”.
Lets say that you buy and rehab a killer deal and your looking at making a 100,000 profit on the sale. Part of being a sophisticated investor will mean that you will know or make a point to find out that upon making the sale you are going to owe a shit ton of green to Uncle Sam. If your in the 35 percent tax bracket your 100,000 turns into 65,000 like magic. To make matters worse if you sell the house in January you may have spent that money long before you actually have to pay it on April 15 of the following year.
This is where the Property Gangster saves you a bundle. If you do a 1031 exchange you can defer all of the taxes into the future and possibly indefinitely.
Tax planning is very minimal if you are simply a w-2 employee, as soon as you start a business or invest in real-estate it becomes very important. Google will be you BFF here so do you research before its too late.