Every real estate investor or business owner knows that taxes take up a big chunk of profit and earnings from investment income and capital gains. Understanding how the tax system and tax brackets work may help you reduce your tax burden and liabilities.
As a real estate investor, you may be able to minimize income taxes either by hiring family members or your C corporation. This article focuses on the possible tax benefits of outsourcing business contracts to a C corporation owned by you.
Interested in learning more? Check out our article, Using Your Family’s Tax Brackets To Reduce Your Tax Burden.
Progressive tax brackets start taxing the lowest amount of income at the lowest rate. The tax rate increases as income rises. Simply put, this means that you would fall in a higher tax rate bracket if you are a high earner; likewise, low-income earners pay at a lower rate.
Here’s a (hypothetical) example of how progressive tax brackets can work:
An annual income of $100,000 puts you in the 20% tax bracket. Note: The tax rates would be applied progressively—the first $15,000 will be taxed at 7.5%, the next $40,000 will be taxed at 15%, and the remaining $45,000 at 20%.
Similar to individual income taxes, C corporations have tax brackets. This is how it generally works:
Ordinarily, all of these money movements can be complicated, therefore it is important to keep constant records of all expenses, payments and transfer of income. All contracts and agreements should be documented appropriately. You may need an accountant to ensure this is done properly.
You are probably wondering how effective it would be to use a C corporation to manage and reduce your taxes and how to go about receiving your income from this business. Well, this is a valid concern and there are various ways to go about it, some more tax efficient than others.
If you're looking for ways to reduce taxes on your real estate business, you can explore the C corporation option. While this may require effort to execute, it could lead to potential savings for your business.
To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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