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Asset Protection Gap Expounded

            When the topic of asset protection comes up among real estate investors and small business owners, minds immediately shift to lawsuits.  What would you say if I told you that lawsuits are not the biggest risk to the assets an entrepreneur or real estate investor has acquired?

            First, a little bit about lawsuits.  Lawsuits generally take 3-4 years, sometimes longer.  It’s just the way the legal system operates.  Sometimes, a year or two can pass between when the activity that gave rise to the lawsuit occurred and the actual complaint is filed with the court and litigation begins.

            During this time, however, a far more serious and persistent threat to the assets of the real estate investor or entrepreneur can occur.  What we saw exactly two years ago is the stuff that nightmares are made of.  At the onset of the COVID pandemic, the nationwide eviction moratorium was announced and enforced.  You can debate how well-intended that moratorium was, but I don’t believe there is any debate regarding what many tenants did in response to it.  Even tenants who could continue to pay their rent were now incentivized not to do so.

            I believe the two biggest threats that real estate investors and entrepreneurs face are taxation and government regulation.  The most important tool you can have to deal with those threats to your net worth and your ability to generate income is “awareness”.  Are you consistently working with a knowledgeable tax advisor and preparer?  Are you taking steps to keep abreast of new industry regulations that impact what you do in business?  Only through awareness can you change your business practices or adjust your transactions to choose the least taxed and regulated manner in which to conduct your business.

            Being a real estate investor or entrepreneur is not easy.  That is why only a small percentage of those who attempt it find significant success.  One of the key skills necessary to succeed is awareness of the types of taxation that apply to your various business activities and how to mitigate that taxation through properly arranging your business transactions.  For example, long-term capital gains are taxed less heavily than short-term capital gains or ordinary income.  Rental income and interest income are taxed at the same rate as ordinary income, but they avoid self-employment tax.  Are you consistently using information like that to adjust the type of transactions or deals you are doing?

            Are you aware of all the potential deductions available to you, and are you carefully tracking your numbers so you can capture those deductions?  About a year ago, I had an eye-opening experience when I started relying on a mileage tracking app on my phone that activated whenever I went somewhere.  It captured a lot more than what I had through the old notebook and pen method in my car.  The app was so sensitive, it was picking up times I was actually in an airplane taxiing on a runway or when I was riding my bike.  Obviously, those two things are not deductible business miles, so I would have to tell the app to put those under the personal column instead of the business column.  That is the kind of accuracy and awareness that led to finding thousands more business-related miles that could be claimed on my taxes.

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