RG 092 – Top 5 Biggest Mistakes Investors Make When it Comes to US Taxation with Craig Cody

About Craig

• Craig is a tax coach
• He was previous a police officer
• Craig has co-authored a book “Secrets to a tax free life”

Nuts and Bolts

Craig is licenses tax coach and public accountant who co-authored a book called Secrets of a Tax Free Life, he is also an ex New York police officer. He started on this journey when he was at college studying economics but took his civil service exam along the side. He comes from a family of police officers and so this seemed like the obvious thing to do, he also found that he loved it and made good money. He rose up the ranks but in the force you have to wait 10 years for a chief exams and by the time that came around his life had moved on. He went back to accounting school to be qualified for something when he was finished with policing and he became a CPA. He joined an accounting firm and then ventured out on his own and started up his own practice. He found his accounting school on the way home from work at the police and his bosses allowed him to work a flexible schedule. Craig advises that if you want something enough you can make it work.

Craig recommends that tax education be at the top of the list for any new investor, it’s the most important thing to learn because a third of your income is going to be going to the government. If you can learn about tax, then you can reduce your taxable income and the best way to do this is to work with a professional. The key to learning about tax and working out your best tax plan is communication with a professional. The biggest mistake that small business owners make when it comes to taxes is failing to plan. When you set up a business you talk to a personal accountant, insurance teams and property management so you should also be organising a tax professional. The second big mistake is holding money in your personal name as this means there is no liability protection if something goes wrong. If you’re investing from outside of the U.S, then it’s even more important to talk to a tax advisor as the US requires tax on worldwide income.

Craig recommends cost segregation as a good strategy for reducing your taxable income. Cost segregation is when a professional comes into your property and breaks down all the component parts of the house into their depreciation time, For example kitchen cabinets will depreciate over 20 years whereas the aircon unit might last for 10 years. By doing this you can get a better tax deduction. Residential property is usually written off over 27 years and commercial is 39 years. When you do cost segregation you can pick up the depreciation in the early years of owning the property and pay less later on. If you only decide to start cost segregation after 5 years of owning the property you can still pick up the missed depreciation. However, this is something you would only do once over the time of owning a property. The second strategy is passive loss; most real estate income and loss is passive if you’re not an investor full time. You can accrue these losses and use them at any time against the income in a tax return. It’s preferable to use them earlier on rather than when you want to sell the property.

Typically real estate is held inside an LLC which doesn’t really change any tax calculations but is beneficial in case of sudden death. Money and property shouldn’t be held in your personal name because personal insurance won’t cover everything. If there’s a problem with the property or you are sued by a tenant, then you may have to sell the property to afford the costs. You can pay yourself out of an LLC and choose to be taxed as a different corporation. If you run yourself as a corporation then you will need to pay yourself “reasonable compensation” and you can get software to calculate what reasonable means. If you’re paying yourself out of an LLC you don’t have to worry about ‘reasonable’ and can let all the profits flow to you.

Top tips

• Most important habit – Writing in a gratitude journal
• Most influential person – His big brother
• Most important tool – Skype, Zoom and Webex
• Most important failure – Concentrating all his energies into one industry before 2007
• Contact – craigcodyandcompany.com