Tax Sales, Tax Certificates, Tax Deeds: Due Diligence Matters!

By: Darius M. Barazandeh, Attorney at Law / M.B.A.

We have all heard the ‘infomercial’ and the Internet claims regarding tax foreclosed property: 

• “You will own the property FREE and CLEAR!”
• “All other liens and interests are WIPED OUT!”
• “You will hold the FIRST PRIORITY security interest!”
• “The Government Guarantees these properties!”
• “All liens, interests, and encumbrances are ERASED!”
• “You can do this part-time with nothing down!”
• “You don’t need to set up a company…just get out there and make a deal!”

While this can make great marketing material it is not in accord with the reality of tax foreclosure purchases.  As an attorney, I learned in law school that every rule of law has an exception. Knowing how these exceptions work will mean the difference between success and failure as a real estate investor on the grandest of scales!  I don’t make that statement lightly, rather I make it with as much of the emphasis and weight that the English language will allow. Please read it again, “Knowing how these exceptions work will mean the difference between success and failure as a real estate investor on the grandest of scales!” If you intend to be successful you must be able to separate marketing fluff from well researched and analyzed fact.   If you rely on marketing materials and hype your failure is nearly certain, however if you rely on well researched information formulated into a methodology then the keys to success in any endeavor are in your hands. 

What Does This Mean to Me and Why Should I Care?

What this means is that you must forget about blanket marketing statements when dealing with tax foreclosed property.  For every statement that is contained in the bulleted list (at the top of the page) there is an exception and just like any business what you don’t know WILL hurt you.  If you have contacted me by email or purchased one of my courses you know that I absolutely believe in covering all the positive and negative aspects of investment techniques.  This does not mean focusing ONLY on the benefits or making wild claims about investment techniques.  It DOES mean thoroughly covering what could go wrong and a relentless approach to risk reduction.

 In the following sections we will review some of the areas that you must consider when researching and evaluating tax sale properties.  I call them due diligence areas #1 through #5.  These are not an exhaustive list but they do set out some of the areas which are typically left out of most people’s analysis.  For a complete list please review my course materials.

Due Diligence Area # 1:

What Liens Will Survive Foreclosure?

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One area that really upsets me is when I hear a general rule of law blindly applied to every tax foreclosure situation with reckless abandon.  Whenever you hear that the foreclosure of a tax lien ‘wipes out all over liens’ or that the property is now ‘free and clear of all other liens’ a general rule has been overstated.  The general rule can be found in the property code of every state and the UCC (Uniform Commercial Code) which covers commercial transactions.  The general rule can be stated as: The foreclosure of the superior lien will eliminate the rights of any junior interests in the realty or personal property.  This general legal rule stands for the proposition that: that when a superior lien (one that was recorded or ‘perfected’ before all others) is foreclosed (i.e., through the state’s legal foreclosure guidelines) any junior interests will lose their interest in the property.  Remember that there are exceptions to this general rule. 

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Let me give you an idea of some of these exceptions:

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1) Federal Tax Liens – Since most liens on a property will likely be liens from the state or a municipality within the state you must be aware of the possibility of a federal tax lien.  You can ask your title company to search for this, however a good title company should spot this lien pretty quickly. 

2) State Income Tax Liens – Some states which have a state income tax may give priority to any liens for unpaid state income taxes.  As the purchaser of the property or the holder of the lien you could still have these liens surviving as encumbrances on your property even after foreclosure.

3) State Sales Tax Liens – Unpaid state sales taxes can result on a lien which attaches to the property of the delinquent taxpayer.  You should contact an attorney to find out if your investment state has a sales tax lien which could survive foreclosure.

4) Mechanics Liens and Materialmen’s Liens – Work performed on the property where improvements or repairs are made can result in a mechanics lien if payment is not made by the party who contracted for these services.  You will find many different names for this type of lien, for example: mechanics liens, materialmen’s liens, artisans liens, workers liens, etc.  

a

Don’t forget to learn more about your investment state as your state could include others or exclude some of these liens. Don’t be scared off by this list, BUT glad that you are now informed about this potential risk. Since you have the knowledge you need only perform adequate research to avoid the risks in this area.

Due Diligence Area # 2:

 Are Environmental Risks Associated with the Property?

a

In some instances you can run the risk of purchasing someone else’s environmental liability.  Congress passed the ‘Superfund Act’ (42 U.S.C. 9601 et seq.) which made every landowner liable for previous environmental contamination on a property regardless of whether they caused the damage or not.  There is some good news for lienholders since Congress has given them an exception from liability if you are a lienholder not considered an ‘owner or operator’.  Court rules and interpretations have been changing regarding this issue so don’t risk it.  I want to be sure my liability is limited therefore I believe in being extra cautious when dealing with commercial properties in the tax sale setting.  If there is some question as to the area or type of business conducted on the parcel you should contact an environmental specialist and ask some preliminary questions about the area and property you are investigating.

If you want to steer clear of the whole issue then you should avoid commercial properties all together. The chances of environmental damage found on residential properties in zoned subdivisions is much less.  I do tell my students to avoid commercial properties unless it’s a really good deal.  Naturally if it is a good deal you can afford to do the extra research to make sure there are no environmental problems on the property.

a

Due Diligence Area # 3:

What About Other Fees Not Included in the Foreclosure?

a

You should always get an idea of whether there are any other fees or dues not included in the foreclosure purchase price.  I know this sounds odd but it can occur if an entity that is owed money was not included in the tax foreclosure lawsuit.  If they did not get notice or did not decide to ‘join’ themselves in the collection lawsuit then the money simply won’t be added to the opening bid amount. The purchaser of the property would still be responsible to pay for these fee amounts.

 a

Here is what I suggest that you do:

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 Contact the tax collection entity or authority (typically the tax assessor)

Ask them which entities they collect taxes for

Then ask which entities are outside of their collection area

Create a list of entities whose taxes are not collected by the assessor BUT may still be owed by delinquent taxpayer

Call and ask the entity the amount of back taxes, dues or fees

Add this amount to your bid analysis

 a

Again, by following a simple step-by-step methodology you can greatly reduce you risk and boost your success rate ten fold.  Make sure you go through this checklist of tasks with every property you consider purchasing.

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Due Diligence Area # 4:

Bankruptcy of Delinquent Property Owner

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You must check to see if there is a looming bankruptcy associated with the property.  I see very few tax sale products covering this issue.  This is an ABSOLUTE MUST in your analysis of any property.  You can access federal bankruptcy records through the federal bankruptcy court in your state.  Some of these records may be online.  There are generally two main possibilities that you must be wary of:

 a

1) A Bankruptcy has occurred prior to purchase – Sometimes you will find that a property is tied up in a bankruptcy administration while it is being prepared for tax sale.  You should avoid properties which are on a tax sale list which have a pending bankruptcy suit.  

a

2) A Bankruptcy has occurred during the redemption period – This scenario can be problematic as well.  Here the property has been sold to tax sale investor but while the redemption clock is ticking the delinquent property owner has declared bankruptcy.  Now a trustee has been appointed to protect the assets of the estate.  The biggest risk to the tax sale purchaser is that the trustee will attempt to argue that the tax sale purchase was a ‘fraudulent transfer’.  For such an activity to occur there must at least some dealing or scheme between the debtor and the purchaser such that an attempt is made to avoid liquidation of the estate by transferring property to a 3^rd party.  While the tax sale purchase really should not be classified as such a transfer if the trustee raises this argument it can interfere with the tolling of redemption period, your ownership rights and the final disposition of the tax sale property or lien.   Keep in mind that if the trustee wins this argument you won’t lose your initial investment, but you will lose any of the anticipated profit.  It is not an easy argument for the trustee to win but just be wary of this possibility. 

a

The best thing to do is to avoid situations where you know the property is involved or will be involved in a bankruptcy.  You should check in the owner’s district of residence for any bankruptcy filings.  Lastly, don’t be too frightened by this issue because doing your research will help you greatly reduce your risk of being affected by a bankrupt estate.

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Due Diligence Area # 5:

Doing Deals in Your Own Name

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This is an area that is very critical to apply and apply correctly.  If I could refuse to sell my products to someone who does not have a legal business entity from which they will make these purchases, I would do it. That means that if I find out you are buying tax sale property in your own name I will come and take my course from you!  No seriously…this is a very critical issue and I just want you to understand how much it worries and keeps me up at night knowing that some of you will ignore my advice and buy tax deeds as ‘John Jones’ instead of ‘Jones Real Estate, Corp.’

a

Why is this such a bid deal? The reason is that when you purchase a property as an individual you are now personally liable for the anything that goes wrong with the property.  This could include someone getting hurt on the property (yes, even a trespasser can sue you), environmental issues with the property, liability from ‘unknown’ liens, and a myriad of other problematic scenarios.  

a

However, when you form an entity you generally will not be personally liable for these acts, omissions, or hidden liabilities.  What will happen is that the corporation, partnership, or LLC will take the hit.  Now why did I say that ‘generally’ you will not be liable?  I said that because if you do not maintain the entity using the proper formalities you will lose that protection.  In a landmark business law case the courts determined that to “preserve equity and prevent injustice” it could “pierce the corporate veil” and hold the shareholders or owner(s) liable for the acts and/or omissions of the corporation if proper formalities were not met.

a

If you go to any real estate investing seminar and they tell you, “Just do a deal or two then worry about forming your company”, please run out the door!  It will only take one bad deal to make you liable thereby risking everything you own.  Before you attempt a deal you should find an attorney to help you determine which form of business entity will serve you:

 Corporation – C-corp or S-corp.; 

    Limited Liability Company (LLC) (Taxed under Subchapter K or S)

 Limited Partnership (LP); 

You should then have the entity up for you and teach you how to maintain its formal status in the eyes of the law.  I have helped individuals with the matter and I can tell you that you must have an attorney who will listen to your needs and spend time educating you.  The reason I think education is important is that if you don’t maintain the entity correctly its the protective shield will not exist in the eyes of the law.   It will be as if you never incorporated at all.  What good will the slick corporate minute book and fancy company logo be if the attorney did not teach you how to keep the entity separate from your personal dealings?  Unless your attorney takes the time to teach you how to maintain your entity status it will be worthless.   

To learn more about business entities, tax choices and avoiding risk, please listen to our free AUDIO SEMINAR! (no downloads required!)

I want to wish you the best of luck in your endeavors and email me if you ever need help!

If you plan to invest in Texas please see: Texas Houses for Pennies™

 If you plan to invest in tax lien certificates states, please see: The Attorney’s Step-by-Step Guide to Investing in Tax Lien Certificates 

                 ______________________________________

Information contained within this article was not intended to be, nor should it be taken by the reader as legal, financial or tax advice. The above article was written for educational purposes only.  If the services of a Texas attorney are desired please contact Mr. Barazandeh or seek the services of another attorney.

Self Storage Investing – By Scott Meyers, CSSM©

Self-Directed IRA’s 

In my Home Study System, I lay out several different ways to raise the cash for the down payment on your self storage facility.  But once again I will caution: I DO NOT RECOMMEND OR APPROVE OF 100% FINANCING, OR THE “NO MONEY DOWN” DEALS THAT YOU HAVE SEEN ON TV, OR HEARD OF BY OTHER AUTHORS AND SPEAKERS!  In the early stages of my real estate career, most of my single family houses and apartment complexes were purchased with no money down and my entire portfolio was approached a 95% Loan to value ratio at one point.  As a result, my cash flow was very tight, and when the rental market went sour after the events of 9/11, I came dangerously close to losing it all, and thought at one point that I may be heading for bankruptcy.  Fortunately, by the Grace of God, and by employing the techniques I have learned and outlined in my Home Study System, I was able to turn things around and I was given another chance to learn from my mistakes.  This is probably the biggest reason I have a passion for teaching others how to invest wisely, and how to avoid the mistakes that I, and so many others in this industry have made when it comes to over-leveraging their portfolio. 

That being said, I have done several deals that have proven to be very successful projects which were purchased with no money down.    The difference was that the deals were SO good, and the upside SO incredible, that I felt safe in leveraging them higher than my usual 80% threshold.  In addition, I have structured the financing of my down payment on several deals in various ways to avoid a large drag on the cash flow of the property after acquisition.  Furthermore, I do not recommend that your portfolio ever rise above a level of 80% Loan to Value, especially if you are making regular payments on any down payment capital that has been borrowed.

As you are already aware, there are several ways to raise cash for the down payment on your self storage deals.  One of my favorites, Self-Directed IRA’s, are a great vehicle for allowing me to invest the money in my IRA, tax free, in the business I love; Real Estate.  In addition, I can set the terms surrounding how the funds are to be borrowed from my IRA, allowing me the utmost flexibility.  I purposely structure the loan from my self directed IRA so that the interest accrues, and there are no monthly payments made until I sell a property, and ultimately pay back my IRA.  There are several companies that can act as the custodian of your self-directed IRA.  I suggest you talk to several before choosing one that meets your needs.  In addition,  there are several transactions that are prohibited, so be sure to ask your custodian about the current laws regarding the use of your Self-Directed IRA for the purpose of investing in your own properties. 

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage™.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing through his company SelfStorageInvesting.com.  To reach him, or to invite him to speak, call 877-366-5773; e-mail Scott@SelfStorageInvesting.com; visit www.SelfStorageInvesting.com  http://www.selfstorageinvesting.com/freeaudiocd.html

Property Tax Assessment Appeals to the Rescue
by Nancy Spivey

Property Taxes Too High? Property Tax Assessment Appeals to the Rescue Are you watching your property taxes go up while your property value goes down? Somehow it seems that even though property values are dropping, the taxes on property are still going up. If this is the case for you, then exercise your right to the appeals process; it’s a fairly simple process. First, you want to compare the tax assessed value of your property to the fair market real estate value. Carefully check your property tax bill for the tax assessed value. Then find the fair market value for your property by looking at recent comparable sales. Real estate agents and websites such as www.homegain.com are good for performing a real estate fair market value analysis. Let’s say that your property is 3 bedrooms and 2 bathrooms and is assessed at $155,000.00. You want to look for recent sales in your area of other 3 bedroom/2 bath properties. An example of the comparables sales in your area might be: 3/2 $138K 3/2 $140K 3/2 $157K 3/2 $165K

How would you make sense of these numbers? If you just took the average of the numbers it would equal $150K. So, what do you do now? Further define the differences in your property and the other comparable sales. One way to do this is to use data from a real estate agent and website like www.homegain.com. Another way is to simply drive by the address of each comparable property (this shouldn’t take much time since they are right in your neighborhood). When you view the comparable properties, look to see how similar or different they are from your property. You might find that the properties selling for the higher end prices of $157K and $165K are brick, while your home and those sold at $138K and $140K have siding. Or you might find that the more expensive properties are larger than yours or have other differences that would make them worth more. Whatever the situation, it is a good idea to take a picture while you are there to show the differences. If you’ve found some substantial differences, it’s time to submit your real estate tax appeal. There is a deadline for the appeals process so pay attention to the deadline dates on your tax bill. Simply write a letter including your parcel identification number explaining why you are appealing the tax assessed value. Include your comparable sales documentation, pictures and other documentation. You will receive one of two responses to your appeal letter. Your tax assessed value may be adjusted based on your appeal letter. However, you won’t always win the real estate tax appeal process that easily; your response letter may be a notice that you are required to go before the board of equalization to further dispute the tax assessed value. At this point, you have to decide if it is worth your time based on the potential savings. Don’t forget that the tax assessed value not only affects your bottom line, but if you get ready to sell your house, the buyer will have to consider the tax bill as part of their expense. The tax amount on the property will impact their monthly mortgage payment, which impacts the amount they can pay for a house. The simple fact that you have appealed your tax value and that it is in line with the fair market real estate value for your property can save you money now and be help when you are ready sell. To learn more about real estate fair market value analysis, visit http://dealsorduds.com . © 2008 Nancy Spivey

Nancy Spivey, known as The Real Estate Investor’s Resource, is an active investor, speaker and coach. Through her training and coaching programs, she helps new and experienced investors create profitability, productivity and prosperity. Nancy serves on the board of directors for the Georgia Real Estate Investors Association, the largest investor association in the U.S. She is also the host of Real Estate Reality Radio. For a free copy of the eBook, The Science of Getting Rich, a list of Nancy’s Private Rolodex Resources, and information on events go to www.transformit.net and sign up for her free ezine, which is loaded with free tips, resources and tools that will help you create profit, productivity and prosperity in real estate investing!

Contact the Author
Nancy Spivey
Real Estate Investing
nspivey@transformit.net

Tax Liens and Tax Deeds - 

Some Basics for Your Success

By: Darius M. Barazandeh, Attorney at Law / M.B.A.

We have all heard the stories and heard the claims about tax foreclosure sales. You know the stories where someone purchases a house or property for $1,000 dollars with a true market value of $50,000. They then turn around and sell it for a huge profit. In fact everywhere I turn someone is talking about the wonderful purchase opportunities that tax sales and tax liens can hold. Before I started investing in tax sales my first question was, “If this is such a great investment technique, why is it that I have not heard about it? There has to be a catch, something that no one was telling me about this technique.” The truth is that you can gain a very favorable return by purchasing tax lien certificates and tax deeds, but as with everything you need to learn from other people’s knowledge, use common sense, do your research, and stay positive!

The General Tax Sale Process

Almost all states allow for a tax sale foreclosure process that allows common citizens, just like us, to purchase tax sale properties. Here’s how it happens:

If an owner of real property does not pay their taxes the county or the taxing entity will file a lawsuit to collect the unpaid taxes, and if such taxes are not paid, the property will be sold at a public tax auction to the highest bidder.

The certificate or tax deed will be sold at a public auction and the opening bid will typically be made up of the amount of back taxes owed. This amount will usually be made up of:

• Delinquent Property Taxes
• Interest Charges
• Penalty Fees
• Legal Costs
• Administrative Charges and Fees

When a tax certificate or a tax deed is sold, the purchaser acquires the rights held by the county or taxing unit. Tax sales may be held annually, semi-annually, quarterly, or monthly. There are no restrictions for bidding in these sales (i.e., you do not have to be a real estate agent, professional investor, etc.); however you usually must be able to pay the bid amount within a short period of time.

For a specified period of time the delinquent owner has the right to buy back or “redeem” the property. This is called the right of redemption. In many cases this redemption period may be as short as 6 months or in states such as South Dakota and Wyoming, as long as 4 years. If the delinquent owner does not redeem the property during the specified time, then the successful bidder is entitled to the property regardless of the purchase price. Let me say that again: the successful bidder would be the owner of the property even if it was bought for $1,500 and it has a market value of $150,000!

That sounds great, but what happens if the delinquent owner decides to exercise their right of redemption? Do I lose my deal and all the money I spend at the action? No not at all! In that case they (the delinquent property owner) must pay you an interest penalty charge on top of what you originally paid for the property. This interest charge could be from 10% to 25% (for redemptions occurring during the first year) or up to 50% (for redemptions occurring during the second year). What this means is that you will get back the money you originally invested plus the interest charge while the delinquent owner will get their property back.

So in most cases either you purchase real property for pennies on the dollar or gain a high rate of return on the money you used to purchase the property!

Here is list of the returns paid out at redemption for various states. Remember redemption refers to the statutory or legal right for the original owner to buy back the property.

Let’s look at an example so you can clearly understand how the redemption return works:

George attends a tax foreclosure sale and he is the successful bidder. He files the deed with the County Clerk or Recorder’s Office. Four months after the deed is recorded the delinquent property owner “redeems” the property. George receives his initial investment back plus 25%!

Here you can see that George was the successful bidder on the tax sale property and he received a tax deed at the auction (more on the difference between deed states and certificate states in a later article). Also note that since the original owner redeemed the property she must pay George the original amount invested plus the state mandated penalty return.

What Happens If the Owner Does Not Redeem?

If the property owner does not redeem you will typically get title to the property. That’s right title! Remember what I said above: If the delinquent owner does not redeem the property during the specified time period then as the successful bidder, you would be entitled to the property regardless of the purchase price. Let me say that again: you would be the owner of the property even if you bought the property for $1,500 and it has a market value of $150,000!

Alright…But What Kind of Deals Are Out There?

Tax auctions can allow you to buy some pretty substantial real estate for pennies on the dollar. Let me show you some examples from my state of Texas that went to sale last year:

Tax Sale Listings from Harris County:

Can you figure out why I shaded some of these property listings? These would obviously be the best deals to investigate and start researching immediately.

Word Of Advice

The shaded deals look great, right? Yes, they sure do but you MUST realize that tax sale listings can be fairly complicated to understand and read correctly. I have run across situations where the significance of one just number before a dash or hyphen can make or break the WHOLE deal! So I want to warn you that nothing comes without its hard work and proper knowledge. For every good deal that you find there are 100 that stink! The best route for the new and experienced investor is to keep learning, asking and researching new opportunities. Always invest in your education and find the right mentors.

Don’t Ever Stop Learning and Never Give Up

No matter what happens you should never give up on learning or give in to the dark riders of failure and fear. Did you know that fear motivates more human action than any other emotion combined? Sadly fear stops many people from trying to learn new things. And you know I don’t blame them! Sometimes it’s really hard to keep learning and growing when you always seem to get knocked down.

I got knocked down a bunch of times then decided that I just had to find a way to make things work. I started to change my mental attitude and think only positive thoughts, see myself doing the things I was destined to do, and completely fulfilling my purpose in life. I decided to go forward regardless of the cost, regardless of the fear and learn new ways to earn income and new ways to help others.

I realized that the more I learned about investing the safer my financial future would become and the more I would be able to enrich the lives of others. I thank everyone for reading my article and being interested in tax sales. Proper information is important so always ask the right questions and find real mentors who have a passion to help.

Don’t forget that this is just information. The real wealth is inside us all. It comes from the power of our minds. So let’s open our eyes to all the new things in front of us, let’s open our hearts to the person we were born to become and towards bright prosperous lives of abundance. Applied faith and knowledge are always your first two steps!

To Learn How to Get Started Today in Texas: Texas Houses for Pennies™

To Learn How to Get Started Today in: Alabama, Arizona, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Montana, New Jersey, Oklahoma, Rhode Island, South Dakota, and West Virginia: Please Click Here

You can also email me if you have any questions: taxenterprises@yahoo.com

Tax Deferral as an Investment Strategy

By Don Burham

Deferring taxes on your income is an investment strategy in which income taxes are paid at a later date for money invested now. The benefit of tax deferral is that it provides more money for you to invest now.

For example, you are able to deduct $1000 from your taxable income this year and invest it into an interest bearing account, and in return, this deduction allows you to pay approximately $200 less in income taxes for the current year. You now have $200 more than if you had not invested the $1000. If you add the $200 you deferred in taxes to the $1000 you have already invested, you now have $1200 growing in your investment.

Another type of tax deferral used by investors is the deferment of taxes paid on interest earned. The dollars invested have already been taxed, but any interest earned is tax free.

Investment Vehicles

Tax deferred accounts shelter your money from taxes until you begin making withdrawals in the later part of your life, when you’re likely to be in a lower tax bracket. The type of investment vehicles best for you depends on your situation.

One available plan is the 401 (k). This vehicle is available only through employers who offer the plan. It allows you to make tax-deductible contributions that grow tax deferred until you withdraw them. Depending on your particular plan, your 401(k) plan may come with a bonus. Some employers match your contributions. You could make 25%-100% on your money instantly if your employer offers matching funds.

A 401 (k) allows you to contribute much more per year than many of the other retirement plans. You can contribute up to $9,500 to your 401 (k) per year and your employer can contribute up to $30,000 per year. You can also have your bonuses issued as 401 (k) contributions to build your retirement wealth even faster. If you ever leave your employer or wish to have more freedom with your 401 (k) investments, you can always rollover the assets in your account into an IRA.

A 401 (K) may work for a beginner at investing, someone who does not know how to invest in stocks or which are the best stocks to invest in.

Another type of plan offered by an employer is the 403 (b). This plan is for public school and non-profit organization employees and it is tax deductible and tax deferred. You can contribute up to $9,500 of your annual gross income each year to this plan.

With 403 (b) plans, beware of a few cautions. Your contributions are generally invested in a tax-sheltered annuity, which may have heavy sales charges and low guaranteed rates.

Anyone with earned income, and the non-working spouse of anyone with earned income, can open up their own IRA and contribute up to $2000 a year. Your accrued earnings are not taxed until you begin withdrawing money from the account. However, withdrawals cannot be made without penalty before age 59 ½..Even if your contributions do not qualify for a tax deduction, your earnings are still tax deferred.

The type of investments you can make with your IRA dollars depends on the custodian, but you generally have many more investment options with an IRA than you do with any of the employer sponsored investment plans.

The Keough plan is available to individuals who work for an unincorporated business or are self-employed. You can contribute up to 25% of your earned income up to a maximum of $30,000. All contributions are tax deductible and your earnings accrue tax deferred. You can contribute much more per year with a Keough than with an IRA. You can elect to contribute a fixed percentage annually, a different percentage annually, or a fixed amount which you decide on. There are three types of Keough plans available and a lawyer can assist you in setting one up.

A SEP, or a Simplified Employee Plan is easier to set up than a Keough allows you to deduct 15% of your self-employment income, to a maximum of $30,000. As an employee, you can contribute up to $7000 per year to your SEP, and your employer can contribute the rest. SEP plans are only available to companies with 25 or fewer employees, and at least half of those employees must participate in the plan.

All of these investment vehicles fall into one of two categories: qualified plans or non-qualified plans.

The 401 (k) and 403 (b) plans are qualified plans. Qualified plans are employer-sponsored plans that provide good benefits but that are restricted to the types of investment options offered by the employer. As we already mentioned, 403 (b) plans often require you to invest your money in tax sheltered annuities. 401 (k) plans generally offer a broader range of conventional investment options, but still seem very limited when compared to non-qualified plans. You usually get to select from a preset choice of investment options such as fixed interest annuities, money market funds, stock in your company, and other traditional investments.

The second category of retirement plans is nonqualified plans. Nonqualified plans generally allow more freedom as to when, or if, a contribution has to be made, and they also offer more latitude in the type of investments that can be made. All IRAs fall into this category. Generally, investors have more control over their investments in a nonqualified plan than with a qualified one. Usually they are easier to work with, have less regulation, and require less reporting. Often, contributions to these plans can be deducted as a business expense.

Most investments made with the vehicles we have been discussing fall into one of two asset categories: The first is debt and the second is equity. As an investor, you are either an owner or a creditor. Equity owners are entitled to all free cash flows that exceed the debt payment obligations of the underlying economic entity. Creditors receive priority in agreed-upon future interest and principal payments.

When choosing a retirement plan, you want to be certain of the types of investments permitted with your plan. Do not open an account that does not give you the freedom to choose your own investment options, whether they are debt or equity investments.

File Amended Returns

For Hidden Savings!

_______________________

Albert Aiello, CPA, MS Taxation

In my former days of being in tax practice I literarily did hundreds of amended returns for refunds of past paid taxes because of missed deductions or strategies. Here were the results:

• Ø First off, NOT one got audited (they usually don’t).

• Ø Most of the taxpayers were real estate investors because real estate is where most of the tax savings are. Most real estate investors have the potential for cash refunds.

• Ø You can amend, not just for one year, but for three years so it could be three years worth of refunds (plus some interest).

• Ø For missed depreciation there is no statutory limit as to the years you can go back, so it could be many years worth of refunds,

• Ø Refunds are often large, sometimes astronomical (as high as $50,000 or even more) – like “found money” that you can reinvest for more income.

Some items for which you can file amendments for:

_Depreciation on rental properties

_Other missed deductions such as tuitions for real estate courses, conferences and boot camps  

_Depreciation on business equipment or automobile

_Other missed business expenses such as auto, leasing, travel, marketing, etc.

_Any other deductions or business expenses for which you have back-up proof

_Tax overpayments, such as social security taxes that should not have been paid on passive income.

For amending returns individuals generally file IRS Form 1040X.   Go for that found money!

For more from Albert Aiello, click here.

Creating Permanent Tax Savings

Temporary Tax Savings These are the type of tax savings
where you save taxes today but must pay them later.  In
other words, the tax is being deferred.  Temporary savings
can be helpful in a tax strategy, but even better is….

Permanent Tax Savings These are my favorite type because
they eliminate tax!

So how do you create permanent tax savings?  Let me first
start with a question:

Did You Consider…? Think about the next trip you are
taking.  Did you consider if it could be a tax deduction?

A. Yes B. No, but I’ve always wondered about this C. No, my
tax advisor tells me this is not possible

What Does Your Answer Say About Your Tax Strategy Creating
Permanent Tax Savings?

Answer A Congratulations!  Your tax strategy is successful
regarding travel deductions.  Even if it ends up not being
deductible, at least you knew to ask the question.

Answer B You are thinking about it and ready to do
something different.

Answer C You could be missing out on significant tax
deductions resulting in paying too much tax!

Creating Permanent Tax Savings When you are able to turn
your current non-deductible expenses into deductible
expenses!  The secret is knowing to ask the question and
knowing what makes a particular expense deductible.

Every dollar you spend is certainly not going to be
deductible, but it’s always shocking how many people don’t
consider the possibility that an expense may be deductible.

The most successful tax strategies include the possibility
that any expense may be deductible.  It’s simply a matter
of determining how it can be deducted and if that fits with
the strategy.

Think about all the different expenses you have when you
travel:

Airfare Cabs Hotels Tips Parking Rental cars Meals

The list can go on and on and we all know it adds up.  This
is why it is so important to look at ALL of your expenses!

Want to Know Even More Ways to Create Permanent Tax
Savings?   I’m so excited to share this information!  I’ve
launched my new 5-week teleseminar course.  It starts June
9th and I spend the second week on creating permanent tax
savings

Behind Every Secret Remember, behind every one of my
secrets is knowledge – the type of knowledge that makes you
aware of what creates massive tax savings so you begin to
see your daily routine a little differently…like how to
turn your non-deductible expenses into permanent tax
savings!

About the Author:

Creating Permanent Tax Savings
When you are able to turn your current non-deductible
expenses into deductible expenses, you create permanent tax
savings!  The secret is knowing to ask the question and
knowing what makes a particular expense deductible.
http://www.ProVisionWealth.com

Like many American’s last February I went and visited my accountant to prepare and file a federal tax return. Many thoughts raced through my mind on how to spend my newly found fortune, new clothes, a well-deserved night out or possibly pay down the credit card. Although all of them sounded appealing, like many of us I used my tax return to pay my property tax bill. This is a common way for many; use our tax return to pay our property tax.

This vicious cycle has been played out every spring since I became a homeowner. It was not until last year that I thought about all of the planning and preparation that went in to my federal taxes only to glance at my property tax bill and write a check without question or a second thought.

After utilizing many available tax deductions and credits many may find that the amount of federal taxes paid is less than the amount of their annual property tax.

When we examine our local property tax the same concepts apply as federal tax, however we rarely take notice. For example most municipalities allow for tax deductions and credits to offset the amount of property tax due. Many states give you a lower tax rate just for owning the home as your primary residence, being a veteran, or if you are over 65 years of age to name a few.

While these credits and deductions are important to take note of the more important issue is what your local government has valued your home at. This can often make the most impact to taxpayers. Known as your assessed value, this is what is used to multiply your local tax rates in order to arrive at the amount of property tax you will owe for the year. This can be one of the most overlooked aspects to homeowners, especially as of late in this current housing meltdown.

It is first important to find what your local assessor has for a property description of your home as mistakes often occur. Verify the square footage, the number of bedrooms and other data on your property record card is correct. Most assessors never look at your home, rather employ mass appraisal systems and rely on public record information to assess your homes value.

Why are we entrusting our local taxing authority to tell us our homes value? According to the Tax Foundation over 60% of homes in America are over assessed. More than half of us are paying too much property tax. All areas do allow taxpayers to dispute their annual assessment while less than 5% take corrective action. Maybe the IRS should take note of our local taxing authorities and make certain assumptions about everyone’s annual income, I would imagine a few more than 5% would disagree with the figure they propose.

The bottom line is we need to take notice of our own property taxes just as closely as we do our federal income tax filings. In this current housing market where a 10% reduction in home value could equal $500 in tax savings it is up to each taxpayer to assess their own assessment.

Eliminate IRS Fear By Knowing Your Rights And “Hidden” IRS Weaknesses!

___________________________

Albert Aiello, CPA, MS Taxation

FEAR-OF-THE-IRS is one of the big reasons why entrepreneurs unnecessarily fork out way too much in taxes. Well, eradicate the fear because you have rights against the IRS.  IRS employees can lose their jobs because of ten possible offenses, including a violation of constitutional or civil rights of taxpayers. You can sue the IRS for up to $100,000 of damages caused by an IRS employee who negligently disregards the tax law and up to a $1,000,000 if an IRS employee willfully violates the tax law.

Also, IRS “hidden weaknesses” can help you. For example, in an audit, you have a much better chance on winning by going to appeals.  Statistics show that the average results on appeal are a 40% reduction in taxes. But only one out of 16 audited taxpayers goes to Appeals. (This is because taxpayers or their tax preparers are afraid to do so, or many tax preparers do not know how to do the Appeals process. ) The Appeals (or “Appellate”) level of the IRS is not a court, but an informal hearing with an “Appeals Officer”, who has a different job than auditors at the examination level.  Their job is to settle cases and avoid the “hazards of litigation”, such as the cost of going to court and the IRS losing. (You do not need an attorney to represent you before Appeals, although you should use a competent tax specialist who could be a CPA or a tax attorney.)

Knowing your appeals rights from the outset of an audit can give you more confidence and strengthen your position throughout the audit. IRS auditors are evaluated by how many cases they close. They therefore do not want your case  to go to Appeals. Just, by saying. “OK if you’re going to play hardball, I got hard bats. I don’t even want to waste my time to talk to your manager. Stop now as I will settle this in Appeals.” This will have a real impact on the auditor. They would realize that you know the rules, you are not playing games and are not easily intimidated.

Even better, knowing your rights from the outset and knowing how the system works, can have an impact on your taxes before you are ever audited (if you are ever audited). For instance, if you discreetly take aggressive positions on gray* areas, you know that you have a good chance of winning by going to Appeals, or by stating that you will go to Appeals, with the good possibility that the IRS auditor will back off, as per the above.

Plus, even better, there are audit-proofing techniques (discussed in other articles) that you can employ so you do not get audited in the first place.  But if you are audited, you have an ace in the hole – Appeals.

Understanding Corporations, Limited Liability Companies (LLC’s) and Limited Partnerships
By: Darius M. Barazandeh, Attorney at Law / M.B.A.
The best way to understand a corporation, limited liability company (or even a limited partnership) is to realize that each creates a special legal relationship or privilege between the business owner(s) and the government. These areas of government include:
1. State Government (including state taxing authorities and the state court system)
2. The Federal Government (specifically the IRS and the Bankruptcy court system)
You may be saying, alright Darius, I still don’t understand what you mean by a relationship or privilege. The best way that I can put it is this:
A business entity is a legal relationship which allows for certain privileges. When teaching people about entities, I like refer to an often forgotten fact: In England during the colonial period the ability to create a corporation required an exclusive grant (i.e., permission) from the Crown (that’s right the King or the Queen!). Remember a business entity is a privilege!
HERE IS ANOTHER TIDBIT: Did you know that when the original 13 colonies were established, many were actually corporations or similar form. For example, the Maryland Company was used to settle and develop…you guessed it, the State of Maryland. Other examples include, the Virginia company, the Massachusetts company and others. Why would someone use an entity to explore and colonize the New World? The reason is that colonization and exploration were risky investments. Ships were lost at sea, diseases ended the lives of thousands, and a host of other risks were present with each expedition.
By setting up these expeditions as corporations investors could contribute money but were only be liable for the amount invested. In other words, these early arrangements promoted exploration, development, and commerce by limiting liability for investors. The same reasoning is true today. When liability is limited to what you contribute to a business, people are more likely to start businesses. THE REASON: Less risk if everything goes wrong BUT more to GAIN when things go RIGHT!
The point of these historical facts is to make it clear that the purpose of a business entity is to limit the liability of owners/investors to the amount contributed to the business. These facts should also make you realize that liability protection is a privilege.
Why Should you be concerned
about liability protection?
I am not here to scare you…but use common sense. Real estate businesses require you to deal with numerous parties, including: tenants, sellers, partners, investors, lenders, management companies, independent contracts, employees, and others. The more parties you deal with the more likely it is that something may not go as planned.
The first step is to learn how to run your business in fair and careful manner…so that you reduce the chances of getting sued. Always remember this: A business entity (LLC, corporation or limited partnership) is not an excuse to act in a careless or negligent manner. You need to be fair when dealing with all parties and you need to outline agreements with partners, vendors, contractors, etc. You need to respond to tenant’s complaints regarding rental property. In short you need to become a MASTER good business practices. I spend a considerable about of time in my courses covering a topic I call ‘Lawsuit Avoidance 101′. This means that we teach you good business practices to help you reduce the risk of getting sued. It’s simply so important!
Another issue to keep in mind is that since you will be dealing with tenants, sellers, partners, investors, lenders, management companies, independent contracts, employees, county agents, you may get into the position where you will need to assert your rights. In other words, you may need to take another person to court, because your rights have been violated, a contract has been broken, or money has not been paid to you. Many times when you assert your rights, you may then be sued by the party you are taking to court. I know this sounds harsh…but it happens! This is called a ‘cross claim’ and it means that the party who is being sued is now also suing. Usually this happens because the other party’s attorney believes that they have a claim and/or they will be in a better position using a cross claim. Basically this means that for you to assert your own rights, you may risk getting sued.
ALWAYS REMEMBER THIS: There are also steps you can take to allow more chances for a pre-lawsuit settlement. This makes the lawsuit truly a last resort. Ask this question: Do you have alternative dispute resolution clauses in your agreements? Obviously, if you can settle matters outside of court via an alternative dispute resolution method, then may be a big advantage and a savings of time and money. An alternative dispute resolution clause will require parties to work at settling a claim through mediation or another non-litigious (and less expensive) manner. Again, a lawsuit should be the absolute last resort. We cover all of these areas in more detail for investors because it something that most people and even some attorneys leave out!
There are also tax advantages and disadvantages to recognize when selecting an entity for your business. We will discuss these in later articles.
To learn more about which entity may be best for you and how to create, run, and maintain an ‘iron clad’ LLC or corporation, you don’t need a grant from the King or Queen…but you should see Mr. Barazandeh’s, Wealth Building LLC ^TM and Incorporate for Wealth^TM courses.
To learn more about business entities, tax choices and avoiding risk, please listen to our FREE AUDIO SEMINAR! (no downloads required!)

I want to wish you the best of luck in your endeavors and email me if you ever need help!
If you plan to invest in Texas please see: Texas Houses for Pennies ^TM
If you plan to invest in tax lien certificates states, please see: The Attorney’s Step-by-Step Guide to Investing in Tax Lien Certificates
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Information contained within this article was not intended to be, nor should it be taken by the reader as legal, financial or tax advice. The above article was written for educational purposes only. If the services of a Texas attorney are desired please contact Mr. Barazandeh or seek the services of another attorney.