How To Use Tax Advantage Vehicles To Offset Your Tax Burden

There is an extensive variety of investment options out there, but one of the main asset classes that I have consistently recommended investing in is real estate. From excellent cash flow to having tax-free equity harvesting events, real estate offers a myriad of advantages. While there is a multitude of ways to utilize tax advantages that are afforded by real estate, let’s dive into how to use tax advantage vehicles in the most advantageous way possible to offset your personal income tax burden.

Using Tax Advantage Vehicles To Create True Wealth

As you ponder over which investment strategy will benefit you the most in augmenting your wealth, it’s important to remember that every investment has costs. The one that tends to hurt the most out of all expenses and can diminish your returns is taxes. Income taxes are the biggest roadblock to creating true wealth and achieving financial freedom.

Nonetheless, there are several tax advantage vehicles you can use that can not only help to counteract your tax burden but can also grow your income tax-free.

When you’re considering how to invest in real estate using the most optimal strategy to maximize your tax advantages, it’s important to first consider the vehicle you’re going to be using. There is a myriad of ways you can invest in real estate from using cash to leveraging (i.e. using bank debt) to utilizing limited partners or investors to even private equity capital. However, it’s becoming more and more common to use retirement vehicles, such as self-directed Roth IRAs, to invest in real estate. 

There is certainly a place for utilizing traditional retirement vehicles to invest in real estate, but I generally recommend using tax advantage vehicles to invest in less tax advantage assets. For instance, the tax advantage vehicle would be the self-directed Roth IRA which will allow growth inside it to accelerate in a tax-free manner. 

Using Tax Advantage Vehicles In The Most Tax-Efficient Way

While choosing the right asset to invest in is one of the biggest factors affecting your returns, how your investment income is taxed also has a considerable effect. To illustrate, if you use a tax advantage vehicle (i.e. a self-directed Roth IRA) to invest in real estate, then I strongly recommend putting it to work in the most tax-efficient way that we can.  

A great example of this would be investing in an active form of real estate… Let’s say a home-flipping partnership. This real estate activity is taxed at a much higher rate than a passive real estate activity by the IRS because it’s considered active income from their standpoint. By utilizing a tax-advantaged investment vehicle (i.e. a self-directed Roth IRA) when flipping property in a partnership, you’re synergizing the tax benefits by growing your profits in a tax-free manner and avoiding the normal ordinary income tax that would follow those activities if you took that income personally. 

Investing In A Syndicate With Your Roth IRA

Now, you might be wondering, “is it wrong to invest in a syndicate with my Roth IRA?” Absolutely not! It’s not wrong to use a self-directed Roth IRA to invest in a multifamily syndicate, for example, as I believe those returns over time will still exceed that of the stock market. 

Regardless, real estate syndicates are already tax-advantaged in that much of the income you’d receive is considered to be passive income. Passive income is taxed differently than your ordinary income. Also, taxes on income from a syndicate will already be offset by the cost segregation analysis that is utilized by the sponsor. 

Depending on the asset and syndicate you’ve chosen to invest in, it’s very likely that you already wouldn’t have to pay any taxes on the income generated by the syndicate. On the other hand, if you generate active income through your active form of real estate (i.e property flipping partnership) and you use a tax advantage vehicle, such as a self-directed Roth IRA, you won’t realize those taxes and your income increases tax-free. This is an extremely powerful tool if it’s used in the correct manner. 

Another great example of how powerful tax-advantaged vehicles are is investing in mineral rights. Most use cash to invest in mineral rights, which is absolutely fine because the returns are still excellent. However, you’ll have to pay taxes on that cash flow in your ordinary income bracket. If you use a self-directed Roth IRA to invest in mineral rights, all of the cash flow you generate goes back into the IRA, which isn’t taxable and grows tax-free. Pretty powerful!

Using Tax Advantage Vehicles To Accelerate Your Financial Freedom Journey

You can see just how important it is for you to utilize tax advantage vehicles to build and augment your wealth. Even more important, you want to make sure that in order to maximize those tax benefits you’re using them to invest in lesser tax advantage assets. 

The point is that investments that are generally less tax-efficient and tend to have their returns taxed as ordinary income are optimal investment choices using tax-advantaged vehicles. No matter what your financial and lifestyle goals are, this strategy is going to grow your net worth much faster and put you on a fast track to financial freedom. 

If you’d like to learn more about how to use tax advantage vehicles to maximize your tax benefits and create true wealth, click here to schedule a free one-on-one call with me today! 

I look forward to helping you start a path to financial freedom and winning back your time!

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