Tax Avoidance & Minimization: What are the best US tax minimization strategies for individuals?
Real Estate Depreciation Depreciation losses on real estate are easy ways to minimize tax burden in the present without creating complicated corporate structures. If you combine near-term losses and depreciation, with a series of 1031 exchanges, you can avoid ever paying taxes on real estate appreciation (assuming there is some in the future). An example: In 2010, you buy 2 houses for $100k each, and rent them out. From 2010-2040, all interest payments are tax deductible, plus the full value of the asset is depreciated on a 27.5 year time horizon. Because of depreciation, you show a net loss each year. In 2040, you sell both rentals for a total of $400k. You perform a 1031 exchange to buy a single family home that you rent out – because it’s a like investment, there is no tax impact. In 2042, after you’ve owned the new rental property for two years, you convert the rental to your primary residence. The status conversion does not trigger a taxable event. When it’s time to move, you can
While it is difficult for many people, the best way to minimize taxes is to work to build equity value in a business, vs. taking wage income. Long-term capital gains are taxed at highly favorable rates compared to wage income. Entrepreneurship has its own additional advantages and disadvantages, but overall, is tax-advantaged in the US. The worst tax position is to be a high wage earner (>$100k as an individual) making highly variable income from year to year; making $500k in one year and $0 in 3 more years leads to a much higher tax bill than making $125k/yr for 4 years; making $30k/yr for 5 years and then selling a business for $5mm increases both pre tax and post tax return. (for 2010/2011 formations, you could conceivably pay 0% tax on a $10mm capital gain in 2016/2017, and minimal tax on a subsistence wage of $20-50k/yr until then).
