Instead of buying a house, you buy a "farm." There's nothing that says a farm has to be big. It might only be a couple of acres. But to make this work, it has to be serious.
You lease the farm to your corporation. Your company will do the farming, just as the big agri-businesses do. Then your company figures it needs you on the scene to help do the farm work. So it makes you a deal. It builds you a new house...and you agree to live in it and attend to the farm chores. Guess what? Now the house is depreciable by the company -- meaning that the company can deduct it over time. The costs of maintaining the house are deductible currently. Even utility costs may be deductible.
And guess what else. You don't have to pay the corporation rent. That's the deal with the company. You didn't really want to live in the house. You're just doing it as a convenience to the company. That's why it's a deductible company expense...and not income to you.
And guess what else. After the lease expires on your land, what happens to the house? Does the company pick it up and move it off? No way. It wouldn't make economic sense. It leaves it where it was. You get it free. Wait until you see what this does to your bottom line!
You sold your $200,000 house. You bought the (farm) land for $20,000, let's say. You paid off the mortgage. You might have lent the other $80,000 to the corporation to build the house, but for the sake of avoiding too complicated a picture, let's just say the corporation put up its own money or got it elsewhere. In any event, since the house is deductible to the corporation (presumably over the term of the lease), here's what happens.
Each year, the company deducts a part of the $80,000. Let's say we can get away with depreciating the property over 15 years -- saying that is the term of the lease. It makes economic sense (which doesn't mean it will actually fly, of course).
What happens is that each year the company deducts the 1/15th of $80,000. At a 40% tax rate, this deduction is worth $2,133 in extra cash. This amount can then be invested and compounds along with the other wealth-building components in this example. In 10 years, with compounding, you have $37,373. Plus, you have the house...or you will have it when the lease expires.
Can you really do this? Yes -- but. In a similar case, the IRS has ruled that you could (IRS Letter Ruling 9134003). Remember, however, these cases tend to turn on the details. Make sure you do it right.
Altogether so far, we've shown you how to get rid of the house in the suburbs and get a new house in a better area. This change alone could add a total of over $200,000 to your bottom line -- the combined effect of eliminating your mortgage, owning a home that is rising in value, deducting the cost of the home, and getting the home for free at the expiration of the lease...
...and we still have not factored in the money you save from deducting the expense of utilities and maintenance. Suppose that cost is just $200 per month and that you pay taxes at a total rate of about 40%. Further suppose that you invest the savings (about $1,400 a year) at 10%. The bottom line of all this is an additional $25,000 or so. It gets even better.
About the Author Adam Starchild has been writing on taxes and personal finance for over 20 years. The above article is reprinted with permission from his book How to Save on Your Taxes Without Cheating.
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