How Homeowners Can Minimize Income Taxes

Introduction

Most Homeowners have heard of the deduction you can take when selling your primary residence. This deduction is called the 121Exemption.

Did you know there are three other different tax minimization solutions for reducing, deferring, or completely eliminating the tax bill on the sale of a Primary Residence or Second Home?

In this series of posts we will discuss the three Homeowner Tax Minimization Options available to you in three separate blog posts. The third category is Income Tax Reduction with many investment options to choose from.

Category 3: Income Tax Reduction

Unlike the previous options we discussed in this series, Income Tax Reduction is not specific to any asset type. Instead, this option reduces your income taxes whether they are ordinary income, W2 income, capital gains income, or anything else.

Income Tax Reduction strategies allow deductions against your Adjusted Gross Income by up to 50% if your adjusted gross income is $400,000 or more.

For Example, let’s say you already sold your primary residence and did not have any of the other tax minimization options above. Now our options are all around reducing your taxable income instead of reducing your capital gains.

Let’s explore these options below.  

Income Tax Reduction Options:

These options can be “stacked” with other Tax Minimization options like depreciation for example to dramatically reduce your taxable income.

1.     Oil & Gas Investments

Oil & Gas investments allow you to deduct your gross taxable income by 80% of the investment amount.

For example, Jim made a $100,000Oil & Gas investment. He can deduct 85% or $85,000 from his gross income before deductions. Next deductions are applied to determine his adjusted gross income or AGI.

Oil & GAS investments can provide significant returns in a relatively short time, but they are high risk and not for everyone. Exploring Oil & Gas investment risks and how they work is beyond the scope of this document, but we can share our vetted companies and all the risks with you.

2.     Historical Preservation Easement

An Historical Preservation Easement is a real estate investment designed to preserve historical buildings. By investing in registered historical real estate, every dollar you invest creates a $2.50 charitable contribution for up to 50% of your taxable income (AGI) plus a preferred return on this investment for 5 years and the return of capital in year 6 with appreciation. In short, this investment turns dollars that would have gone to the IRS into a real estate investment.

Let’s walk through an example…

Betty is a consultant and is projecting her adjusted gross income to be about $500,000. By investing$100,000 in a Historical Preservation Easement, Betty can take advantage of the2.5 to 1 deduction and reduce her AGI to $250,000.

Now Betty’s state and federal taxes are based upon her new AGI of $250,000. Her $100,000 investment is now the basis of a real estate purchase. She will earn income from this investment for5 years and in year 6 the property will be sold.

Upon sale, Betty will receive her investment capital back plus any appreciation. This strategy typically saves more money in taxes than the cost of the investment and you get your original investment back plus income, plus appreciation.

3.     Fee Simple Donation

A Fee Simple Donation is a non-cash charitable contribution. By investing in a real estate partnership, every dollar you invest creates a ~$5 charitable contribution for up to 30% of your taxable income.

Let’s walk through an example…

Tim is a real estate developer and is projecting an adjusted gross income to be about $1,000,000. By investing $60,000 in a Fee Simple Donation, Tim can take advantage of the 5 to 1 deduction and reduce his AGI by $300,000 to $700,000 taxable income.

Now Tim’s state and federal taxes are based upon his new AGI of $700,000. This investment is a one-time investment with no returns beyond the tax savings.  

This strategy typically saves more money in taxes than the cost of the investment.

4.     Historical Preservation Easement & Fee Simple Donation Combo

By combining the Historical Preservation Easement with the Fee Simple Donation, we can take the best of both solutions and apply them both to this year’s tax bill.

Let’s walk through an example…

Anthony and Sara are married and filing a joint tax return. Their combined AGI is $1,000,000. By combining the Historical Preservation Easement with the Fee Simple Donation, they can make a smaller investment to reduce their taxable income by up to 50% and take advantage of the additional returns provided by the Historical Preservation Easement.

How does this work?

By investing $60,000 in the Fee Simple Donation, the couple reduces their AGI by 30% or $300,000. If they use an Historical Preservation Easement, they can reduce their AGI by 50%, but the Fee Simple already took 30%.

They have 20% or $200,000 in additional savings available to them. So they invest $80,000 in the Historical Preservation Easement at 2.5 to 1 to get an additional $200,000 tax deduction reducing their AGI by 50%.

-         20% or $200,000 deduction for $80,000 via the Historical Preservation Easement

-         30% or $300,000 deduction for $60,000 via the Fee Simple Donation

-         Total Investment of $140,000 for a 50% tax deduction or a $500,000 deduction

Summary,

Even if you missed the opportunity to use the other tax minimization options in this blog series, you could still reduce you taxable income by leveraging the options in this post.

Remember…

Oil and Gas investments reduce gross income, Historic and Fee Simple reduce AGI.

All the strategies in this post must be completed in the tax year the income was earned. The Historical and Fee Simple solutions are charitable contributions. If you made other charitable donations this tax year, have a foundation or503(c), these solutions share the same set of limits. So, we need to speak with your CPA before investing.

These are complex strategies and should be explored with the help of an expert who places your best interests first. Let’s face it, if someone has one or two options, they are not a tax strategist. They are a salesman trying to sell you their product.

We have over 40 tax minimization options on our platform. We are nationwide educators and keynote speakers on Tax Minimization. We are also real estate investors, business owners, homeowners, and high income earners. We use the strategies we recommend!

Once you pick the strategy that is right for you, we connect you with our network of vetted providers that are “best in class” in the industry. How do we know that? We use them ourselves. You can work with one of them or someone else. It is entirely up to you.

I hope you found this document informative. We have more detailed content and videos on this tax strategy at DeferTax University. Click here to learn more.

Our exploration of Homeowner Tax Minimization in this series is complete. If you’re interested in exploring tax minimization for other asset types, check out our website at DeferTax.com.

Our website, StartAnExchange.com The easiest place on the internet to Start an Exchange, has more information and educational materials on the 1031 Exchange and more ways to save when exiting an exchange.

Our website, DeferTax.com, has more information and educational materials on over 40 tax minimization options for a primary residence, second home, investment property, business, stocks, crypto, and ordinary income tax reduction.

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