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Case Study: How We Helped a Couple Save $160,000 in Taxes After a Big Whoopsie!

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John and Sally (we’re excluding their last name) came to me when Sally was retiring as a nurse and they were considering investing her retirement into a property.

They already had a bunch of rental properties, so this was old news to them, however they had never purchased a property in this way, which was through a self-directed IRA.

I had advised them that there were specific things they could and couldn’t do when purchasing a property this way, but unfortunately those rules failed to be followed.

You see, when you purchase a property through a self-directed IRA, the owners must abstain from doing anything with the property. They refrain from making any repairs or touching it in any way, even down to mowing the lawn.

And here’s where the big whoopsie comes in…

John started remodeling units, and that mistake cost them $500,000!

How is that possible, you might ask?

Violating IRA Rules

Well, they had to take the property out of the IRA since they violated the rules of the IRA, which resulted in $1M in income and $500,000 in taxes.

John and Sally realized the issue when their son, Doug, who works in property management, notified them of the problem at the end of the year.

When they finally came to me, it was almost too late. And had they come to me sooner, they would have had many other options to make the situation less of a sting.

Options Are What the Best Accountants Do

With the little time we had available, I got to work researching the different ways I could help reduce their tax burden.

I came back to them with 4 options for legal tax mitigation: 

  • A: Status Quo: Do nothing and retain the $500,000 loss.
  • B: Partnership Investment: Invest in a partnership solely for a $160,000 tax mitigation. This investment would cost them $80,000 to get into the investment and would intentionally result in a $0 return, but with $80,000 in positive cashflow.
  • C: Investment: Invest in the energy sector for a $175,000 tax mitigation. The investment would cost them $100,000 to get into. Historically, this type of investment gets fully repaid, thus, resulting in $175,000 positive cashflow. However, we were too late to execute on this option.
  • D: A Combination of “B” and “C”: Unfortunately, we were too late for “C” and the cashflow would have been lower than “B” and “C” were on their own.

Option “B” was the only one of those options that was available at that point since it was so late in the game.

That investment allowed them to write off some deductions in the first year. As people acquire more money, doors open for different investments that can provide legal write offs, and fortunately this was a viable option for them.

$160,000 in Tax Savings

John and Sally paid $80,000 to get into an investment that cut their taxes by $160,000. I saved them 32% on their tax bill, but since it cost them $80,000 to get into it, the net cash they saved was 16%.

It was very unfortunate that they waited to come to me until the end of the year since investments are less available then. If we had more time, they could have had 4-5 additional options to choose from, which could have saved them up to $250,000.

This is why I prefer when my clients come to me BEFORE they make decisions, hence it’s called tax “planning.” I always say…

“Let’s make decisions together so we can plan instead of react.”

What a Typical Accountant Would Have Done

Most accountants fail to go above and beyond the typical stuff that is expected of them. In fact, most of them fail their clients for the following reasons:

They Just Do Taxes

Many accounting firms believe that they are simply there to do your taxes and that it isn’t their job to go beyond that. Instead, we work with our clients proactively and holistically all year long to ensure their money is always working for them.

They Lack Creativity

Creativity and accountants rarely go together, which is why there is often a lack of ideas for improvement, but at Downing & Co, our CPAs think outside of the box and it fires us up to solve complex problems.

They Are Too Formal & Technical

Most accountants use technical jargon and stale formalities that make dealing with them difficult and frustrating. On the other hand, our CPAs are down-to-earth and conversational so that you more than just understand what we are saying; you enjoy dealing with us too.

Do You Want More From Your Accountant?

You could stick with your current accountant and miss out on opportunities to save $100,000s and earn much more than that in profits.

Or you could book a free consultation with us to see what you’re missing out on.

Book a Free Consultation

We’ll take you through our proprietary client interview process to review your unique situation and develop actionable recommendations that meet or exceed your tax, bookkeeping, or estate planning needs quickly and conveniently.

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Tim Downing

About the Author

Tim Downing is a CPA and owner of Downing & Company, LLC. Since taking over the company in 2013, he has evolved it beyond what is expected from accounting firms, giving his clients proactive and holistic solutions that help them make their dreams a reality, in this life and for the legacy they leave behind.