An investor with more assets should be able to generate more cash flow than another investor with lesser assets. One way to maximize your assets is to defer payment of taxes.
Most tax "saving" strategies are simply techniques to postpone the payment of taxes on investment gains until a later date. In the interim, you will have more to invest, and can earn greater returns, than if you paid taxes earlier.

The impact of deferring taxes can be dramatic, so a systematic investment plan that utilizes tax deferral techniques should be your goal. If you earned 8% on your investment and paid taxes at a 33% marginal rate, after taxes you would only have 5.36% to reinvestment each year to compound. If you were able to shelter that annual income from taxes, over a 20-year period your assets would grow to twice as much than if the annual income were taxed.

Avoid selling
When you sell a property at a gain you may be subject to capital gains tax. If the property is a good one, you may benefit from holding the property instead and continuing to let it appreciate. Before selling a property you hold, examine the reason you are selling. Some reasons are legitimate, and others simply amount to unnecessary churning, which causes tax problems and incurs needless transaction costs.

If you want to generate more cash flow, consider borrowing the money supported by your equity in the property instead. (Tax friendly techniques for generating cash flow from your inventory of assets will be the topic of another newsletter.)

Borrow to shelter current income
The amount of taxable income you receive from operating a property can be managed, to a large degree, by how much debt you carry against the property. Many investors borrow a large share of the purchase price when acquiring investment property. The interest on this debt, which is tax deductible, usually reduces the taxable income to a very low level.

As years pass and operating income increases, the value of the property and the equity in it will increase as well. If you are a more aggressive investor, you could consider refinancing to increase your debt, which will act to reduce your taxable income from the property and help continue to shelter the cash flow from taxes. In addition, the borrowed equity can be used to acquire another property, to compound your growth.

Use tax-deferred exchanges when you do dispose of properties.
The federal tax code accords a special benefit on real estate investors, not available to investors in any other asset. This is the "tax-deferred exchange." Investment properties can be exchanged for other investment property and tax on any capital gains can be postponed provided the transaction meets certain IRS guidelines.

Execution of the tax-deferred exchange can be tricky, so get some professional guidance before attempting this.