Killer Tax Saving Strategy for the Self-Employed

Image from www.https://elderpark.org

 

If you work for yourself, you know how hard it is to swallow the 15.3% self-employment tax you must pay. But did you know there are ways to lower it and one way is to rent to your spouse?

It sounds crazy, but if you own an office building or other business assets, you can rent them from your spouse.

The rent becomes an expense you can write off, leaving you with a lower tax liability.

How Renting from your Spouse Works

Renting from your spouse can work in one of two ways.

  • If your spouse owns 100% of the asset, you can write off 100% of the rents you pay to him/her. Take an office building, for example. If your spouse owns it alone, he/she can rent it to you, and you can write off the full expense.
  • If you both own the asset, you can write off 50% of the rent you pay to your spouse. Since you own half of the asset, and your spouse owns the other half, you can only write off the portion that would go to your spouse (50%).

Tips to Make Renting from your Spouse Work

To rent from your spouse, there must be a formal lease agreement. The arrangement must be the same as if you were renting from a complete stranger. This means:

  • You must have a legal and ‘real’ lease.
  • You must pay the fair rental value for the area. You should not pay any more or any less than this amount. If you own 50% of the property, you’ll only pay 50% of the fair market rent.
  • You must make real payments each month. Write your spouse a check or make an electronic payment, just make sure it’s traceable.
  • Your spouse should have a separate account to collect the funds. Don’t deposit them in your joint checking account.
  • All expenses for the property must be taken care of by your spouse.
  • You must provide your spouse with a 1099-MISC for the rents paid

The Tax Liabilities of Giving your Spouse Property

The good news is you can give your spouse the business property and then take the rental deduction by paying him/her the rent. However, use care because if there are divorce proceedings, there could be issues with ownership.

If you’re looking for creative yet legitimate ways to lower your tax liabilities from self-employment, contact us today. We’ll help you understand if renting from your spouse will work in your situation. Since every business and marriage is different, it’s important to look at the big picture and know what you’re able to do.

Contact us today to learn more about this unique deduction and we’ll help you set it up so you get the maximum deduction for your rent.