Why Every Storage Investor Should Know Something About Taxes.
Updated: Apr 27
Taxation Knowledge Saves Investors Thousands of Dollars While Creating Other Investment Opportunities Through Seller Financing.
Investing in real estate can be very lucrative for the savvy real estate investor if they have a comprehensive understanding of taxation. Unfortunately, many investors, in my experience, do not have a strong enough knowledge of taxation, income taxes, and write-offs, or the understanding of the missed opportunities, costs, and possible penalties of not knowing this information. This knowledge is super valuable when it comes to investing as it allows you more leverage with the monies you have With that, you want to know as much as you can about taxes so you can pay as little income tax as possible. And, it is not enough to rely on your tax accountant even if they understand business entity structure and are knowledgeable about investment strategy.
Given the information above, I am about to do something a bit crazy, but being a man of transparency, I am committed to revealing it. In sharing what I am about to divulge, I am hopeful this information does not come off as arrogant. I ask that you are mindful that I am sharing this personal information not to brag, but to inspire you to see what is possible in your taxation regarding write-offs and tax shelters.
Last year, I paid income tax on 10% of the total profit that our storage business generated in 2019. Roughly, there was $900,000 in revenue, and we were able to shelter $820,000 legally and legitimately. The results reflect that I paid taxes on 80 grand even though I made almost a million dollars.
I expect that you want to understand how we did this legally, and we will probably conduct some of our future The Storage Rebellion University calls around mapping out the various strategies that I've used. More pertinent to this discussion is your understanding of how taxation can help you sell the idea of seller financing to the seller.
Here is how a strategy would work utilizing an example. Let's say the seller is going to profit $1 million on a sale of a property. If you pay them $1 million, they're going to spend a fortune on taxes. One of those taxes is called the Negative Income Tax (NIT), also referred to as the Obamacare Tax, which is a 3.8% Medicare surtax levied on net investment income above $250,000 (married filing jointly) In other words, If the seller receives more 200 grand on that sale, every dollar above $250,000 up to the million in revenue, the sellers will pay almost 4% in taxes.
That equals almost $30k based on the $750k in extra income above his initial $250,000. He's going to pay almost $30 grand in taxes this year, and he's never going to get it back. On the other hand, if that same investor, assume he only makes $250 grand a year for five years with no other additional income, he would never pay that NIT tax cause he's under the $250,000 threshold throughout the whole five-year period. He would generate almost $30,000 extra a year by not having to pay that NIT tax. You just saved him a load of money that is significant. If you can help them understand those kinds of saving and expenditures, they are likely to play. And, think, that is only one example. For instance, depending on your overall tax brackets, there are other tax benefits that you can phase-out. In all of this taxation, the more you understand about them, the better investor you're going to be.
As you can see, understanding the investing language and results will leads to better conversations, better conversions, and better conservation of your funds! To learn more about Self Storage investing, visit The Storage Rebellion University where you will gain instant access to more videos that allow you to set the course of your real estate future.