Sunday, March 15, 2015

Tax strategies and tips

With the April 15 deadline for filing federal income tax looming, as an investor you need to take some time now to ensure that you are handling your taxes strategically and preparing yourself for a secure future.

No tip is more important than the dedicated act of organization all year long so that tax season can be a routine exercise, not a period of stress and frantic searching. Even if you have a financial planner handling your investments or you hire a Certified Public Accountant, they can only assist you to the degree that you provide them with thorough and accurate information.

The days of shoving everything into a shoebox and showing up in the rush period of tax season hopeful that a virtual stranger can create order in your affairs and take full advantage of all tax savings for you is bordering on the ridiculous. Tax strategy is a 12-month exercise.

However, there are a number of portfolio checks you can consider this time of the year to ensure that you maximize your tax savings.

Owning rental properties

One source of investing that has sizeable tax advantages in the United States is rental property. An investment in a $100,000 rental home, for example, means that you can depreciate the structure of the home over 27.5 years.

You cannot depreciate the land basis, but you can still save a lot. For example, if the lot is valued at $10,000 and the house itself is valued at $90,000, each year you can claim a tax deduction of $3,272.73. Simply calculate the house value divided to 27.5 years to see how this would apply to you.

When you further deduct your expenses and maintenance of the house, and then calculate your rental income, you still may end up not having to pay a penny on this asset.

And even if the house and property increase in value substantially throughout the years, you still don’t have to pay tax on the appreciation until you decide to sell it. It can amount to a substantial saving.

When you do decide to sell that property, if you do a 1031 exchange, which means to move your profits into a new property purchase, you may again escape taxation.

The 1031 Exchange
The United States Internal Revenue Code Section 1031, often referred to as the tax deferred exchange, is a tax strategy that allows you to sell one qualified property and purchase another qualified property within a specific time frame and save taxes in the process. In essence, the IRS is allowing you to classify this transaction as an exchange, not a sale, and you do not have to pay taxes on the profits you gain from the sale of the first property.

If you decide to engage in this strategy, be sure that you are familiar with all the rules and caveats of the Section 1031 or have an adviser who can assure you that you qualify.

Basically, however, if you plan to replace one kind of real estate with a similar kind of real estate, you should consider this.

Asset Placement

Another effective tax strategy, asset placement, involves re-examining your investment portfolio to check whether or not some of your investments which produce ordinary income could produce better inside a tax-deferred plan. It also considers whether or not investments that produce long-term returns might produce more favorable tax results if they were in taxable accounts.

You may sometimes find yourself surprised that a person with a portfolio similar to yours is actually paying less tax. That is when you realize that where you are holding your investments can be just as important as what you are holding.
The bottom line you need to be watching when you examine asset placement is what you earn on your capital when you factor in the compound annual after-tax, inflation-adjusted return.

When you are not diligent about this, and you end up overpaying taxes because of it, you are essentially cheating yourself twice. You lose the money to the IRS initially and then you lose your ability to take that money and re-invest it to earn more profit.
It is a good idea as tax season approaches to sit with your financial advisor and find out more about the different tax treatments your different investments receive based on where they are held.

As an example, you will pay less tax on income you receive from capital gains than you will on income received from bond interest and dividends.
As a general rule, if you have high-yielding common stocks that have consistent dividend payouts, risk arbitrage transactions, corporate bonds and shares of real estate investment trusts (REITs), they should all be placed in such tax-advantaged accounts as the 401k or the IRA.

If you have common stocks that you expect to hold for more than a year and which have no dividend payouts, or very little, you should keep them in regular, non-tax advantage accounts. The same can be said for tax-free municipal bonds.

Check out your passive income

For the investor, the ultimate prize is passive income, that money that just keeps on coming without a fresh infusion of labor or cash.

During tax season make sure that you are getting to keep the money that is coming in.
For example, if you invest in a tax-free municipal bond, you can escape taxation entirely, but if you purchase a traditional corporate bond, you could be paying as much as 41 percent of your passive income back to the IRS.

It is important to always figure out your actual, after-tax income each year. You may be able to keep more of your money just by shifting the types of holdings you have.

Revisit your portfolio yearly

When it comes to effective tax strategies, include setting aside time each year in the non-tax season to review your entire portfolio. Some people link their review to a specific event in the year, the week after their birthday for example. It doesn’t matter so much when as that you book it and do it.

Go through every single one of your investments, analyze them, and ensure that they are still growing, that they are still safe, that they are diversified and that they yield good after-tax results.

Sunday, March 8, 2015

5 Ways to Earn Passive Income

Let’s start this discussion by clearing away a myth. There really are no truly passive income sources right now - if there ever even were any. In order to generate any kind of passive income, you typically have to do one of two things:

1) Invest a bunch of money, or
2) Add an income earning source to an existing active venture

Keeping those two realities in mind, here are 5 ways to earn passive income.

1. Real Estate Investment Trusts (REITs)

In the long run, investing in real estate is one of the best ways to create passive income. You buy a property, rent it out, use the proceeds of the rent to cover the monthly payment, plus a little extra for profit. As the years pass, and the rents increase, the profit portion gets higher. Once the mortgage on the property is paid in full, the property becomes a cash machine.

The limitation of direct investment in real estate is that it requires a large down payment up front and it can be difficult to buy a property that will produce a sufficient rent to cover your monthly payment and give you a profit.

But there’s a better way to invest in real estate that will enable you to overcome those obstacles. REITs are like mutual funds for real estate. A REIT will hold several commercial properties, typically office buildings, shopping centers, or apartment buildings. The REIT can either have an equity position in the properties, invest in their mortgages, or some combination of both.

Best of all, REITs pay dividends that are generally much higher than the dividend payout on stocks, and much higher than the interest rate paid on fixed income investments. And unlike direct investment in real estate, they can earn you a passive income as soon as you begin investing, and you can sell and cash out any time you want.

2. Robo Advisors

These are online investment platforms, that are essentially investment managers. You turn your money over to them, and they invest it for you in exchange for a small fee (generally less than 1%). They allocate your portfolio based on your own risk tolerance and investment goals, re-balance the portfolio as necessary, and even provide tax loss harvesting to minimize your income bite. 

You can pay a human investment advisor to do the same, but the fee will be somewhere between 1% and 3%, and that will reduce your investment returns.

Two prominent examples of robo advisors include and Each platform does some things better than others, and which you might choose to work with will depend mostly on your own personal preferences.

You can invest your money with these platforms, earn income, and never have to spend one minute managing your portfolio. That’s passive investing at its finest.

3. Your Own Blog

If there is a topic or two that you are passionate about, and you love to write – or create pod casts or videos – creating your own blog could be a natural venture. Though it isn’t passive in the truest sense, it is an opportunity to create an income that comes from a hobby or passion. And the income that you receive is only loosely connected to the amount of effort that you put into it, especially once the blog is up and running.

Essentially what you do is create your own blog using a website application, then regularly add relevant content to the site. You can promote the site through the social media, and by writing guest articles and commenting on related sites.

Once your blog’s been around for a few months, and you have a few thousand visitors each month, you can begin to monetize it. You can do that by adding Google AdSense, paid banner ads and a variety of other ad types. The ad revenue will roll in each month from then on, creating a whole new cash flow.

4. Affiliate Programs 

If you have a blog, or a business website, there are affiliate programs that you can participate in that will provide you with an extra income. For example, if you have a blog, you can participate in affiliate programs through They give you everything you need to set up an affiliate program on your site. Then every time someone clicks through an ad or link on your site, and makes a purchase, you will get a percentage of that sale.

You can also do this for a business website. Whatever your product or service line is, you can also participate in affiliate programs through related vendors. They will pay you a percentage of their sales that come from your site, which can be anywhere from 10% to 50% of the purchase price. 

Whether you have a blog or a business website, this is a way to add a passive income to an existing active venture. 

5. High Dividend Yielding Stocks

The ultimate source of passive income is interest income. You invest your money with a bank or in a bond, and you get back interest income – without having to do anything at all. The problem with that strategy right now is that interest rates are downright microscopic.

But you can use high dividend yielding stocks to earn healthy returns on your money. It’s fairly easy to get stocks that are paying dividends yielding 3%-4% per year, and you can do even better than that by investing in dividend paying stocks where the stock price has been depressed by the kind of bad news that doesn't hurt the company’s cash flow. 

There’s also a bonus to this type of passive income, one that does not generally occur with interest-bearing investments. In addition to the dividend yield, you can also get capital gains income. This is particularly true if you hold the stock for several years, or if you buy a stock that is depressed in value. Over several years, the income that you earn on the increase in stock price can be more significant than the dividends.

The advantage to all five of these ways to earn passive income is that each is relatively low risk. There are other ways to earn passive income, but they would involve taking on an abnormal amount of risk, such as becoming a silent partner in a small business. That kind of venture could make you rich with little effort – or it could leave you broke. So take a stab at one of these five, and see if you can’t get a decent passive income going.

                                                                                                   Kevin Mercadante (