Just a Landlord

The following was a post from Ray Como ten years ago. I’ve reposted it to the ApartmentAssoc@YahooGroups.com email list (More info about this free, open to all disussion group) every year since. Even if the ideas themselves are not suited to your situation, they may get you thinking of other ideas that better fit you or at least remind you three weeks in advance that the tax year is coming to an end. — Tim

Each Year

On or about this time of the year you should be thinking of strategies that take advantage of the “straddling-effect” that occurs every December 31st.

This will be worth thousands (maybe millions) to you and your corporations, if you simply TAKE ACTION!  With that—lets talk deductions and straddling strategies . . .

Tim’s Disclaimer:  I am “just a landlord,” NOT an attorney or accountant. If you need legal advice, tax advice or have appendicitis, Please don’t rely on something you read on the internet and do it yourself. Rather, hire a competent professional.

Strategy #1..  Invest Marketing Dollars on or about December 31st every year. Invest as many marketing dollars as we can spare.  You can do the same thing.  Mail lots of letters on December 31st.  Pay cash for ads.  In essence, use this strategy to invest marketing dollars in this tax year—knowing that returns cannot possibly come in until the following tax year.  This “straddling” is a good and easy way to defer payment of tax.  Use this strategy every year and you defer the tax indefinitely.

Calculate the present value of not paying the tax many years into the future.  You will see that the longer  you postpone paying, the less you are really paying in today’s dollars. And remember, you are using those same dollars in other profit-making ventures and investments.

For example, it is obviously smart to use these now-available, “saved-dollars” to buy discounts on other items you want to pay early and in advance.  Consider this: Other corporations and suppliers may need that added cash flow, so you can make a deal to pay “in-advance-at-a-discount.”  They get the cash flow;  you get the discount and write off this year.

Strategy #2.  Adopt an MRP. A Medical Reimbursement Plan (MRP) is provided for in Section 105b of the Internal Revenue Code.  Contributions are 100% deductible to the corporation.  Benefits received by employees and officer employees in the form of medical expense reimbursements are not taxable to the employee.

An MRP is not insurance so there are no scheduled payments but all the money allocated to the MRP is tax deductible to the corporation.  This allocation is usually related to the tax planning decisions of the corporation.

Clearly, the MRP must be formally adopted by the board of directors of the corporation, and once it has, it can be flexible.  It is completely controlled by the corporation.  The corporation determines what funds are to be placed in the MRP account during any given tax period. Therefore, look at year-end tax liability and seek to offset it by electing to allocate sufficient money to the MRP to zero-out that tax liability. Then invest in health related items like running shoes, mountain bikes, skis and maybe even an ab roller.

Strategy #3.  Pay For Deferred Maintenance. Do lots of cosmetic work on real estate in December.  Winterize.  Insulate.  Do preventive maintenance.  Bleed water heaters.  Clean furnaces.  Patch roofs and gutters.

It is wise to borrow this money even on a credit card because: (a) the first payment will not be due until next year, (b) the interest on the loan is deductible and (c) so is 100% of the improvement and/or repair.  That’s a neat hedge. (Psssst…and btw, this process maintains and often increases the property’s value.)

Strategy #4.  Make Prudent Charitable Contributions. Give to your favorite charity so at least that money will go where you put it, instead of the tax man (oops,) that’s tax “person.”

Strategy #5. Buy a College House. Then pay your college age child up for management, accounting, advertising and clean up.  Your kid can lease the house from you and sub-lease the house to his/her school chums.

There are lots of interesting benefits here.  (a) You get the deduction. (b) You lower your tab for college because he has no dorm fees.  (c)  Your kid learns the management game along with lots of responsibility.

Strategy #6. Pay Payments In Advance—at  a Discount. Write the following letter to everybody you owe.  We have used this format year after year with excellent results.

Dear Mr. and Mrs. Smith:

We  really appreciate the opportunity to do business with  you.  You were really kind to finance the property for us and  we wanted to express our appreciation.

At the present time the mortgage balance is $10,000. There are 120 payments remaining on the mortgage.

If you need some money for the holiday season, let us know. We can possibly make some payments in advance.

If you pay six months in advance at a 10% discount you will buy an investment in your own payments that will yield you a 37.15% return. For example, suppose you were making payments of $100 a month.  You might offer to pay $540 (in advance) in lieu of paying your regular payment.  Watch what happens when you put the following into your financial calculator and solve for “I” (interest or yield).

Notice that the yield is 37.15%.  You can make this even better if you got a 15% discount because a 15% discount equates to a 58.21% yield.  Use the same formula as above except you invest $510 in advance, which is $600 – (15% x $600) = $510. Watch the effect.

The good news is that you can do this on any installment payment you are making.  You can make advance lease payments (at a discount) when you are in a sandwich lease position.  You can make advance payments on the seller financed note you used to buy your business. Really, you can offer to make any installment payment in-advance-at-a-discount.  Every time you get 10% off you earn 37.15% and every time you get 15% off you earn a whopping 58.21%!

Strategy #7. Invest in IRC Section 179 Assets. Computers, copiers, fax machines, typewriters, cellular phones, pagers, cameras, VCRs, furniture, fixtures, file cabinets and lots more. Again, it is wise to borrow this money (even on a credit card) because: (a) the first payment will not be due until 60 days into next year, (b) the interest on the loan is deductible and (c) so is 100% of the cost of the asset in the year of the purchase.

Strategy #8.  Pay sales taxes and income taxes.

Strategy #9. Pre-pay subscriptions and seminars.

Strategy #10. Pay annual retainers.

Strategy #11. Pay your children.

Strategy #12. Pay your spouse.

Those of you that implement these ideas (even some of them,) will prosper greatly.

Happy New Year

Ray Como