For the most part, most equity accrual within the confines of a typical Auto Recycler’s operation pretty much caps off when gross sales and the subsequent net profit caps off. In other words, reaching a peak in total sales will likely cause the business’s net worth to peak. With that said, in this article, Robert Steward, Tax Consultant at R.E. Steward & Associates, based in the US, discusses a method by which to continue to add to the company’s net worth by diversifying and investing a portion of the annual net profits into a vehicle that not only typically appreciates in value but also has the potential to produce tax savings benefits on an ongoing basis. That vehicle is income-producing real estate, both commercial and residential.
Over the years, we have observed many of our accounting and tax clients benefit substantially from the ownership of the real property that provides the land for the day-to-day operations of the recycling company. In doing so, the company reaps the added prosperity of the long-term gains in the value of that property. In addition, in some cases, the land that the yard sits on becomes so valuable that considerable thought has to be given to possibly relocating the operation to capitalize on the rise in the land’s value.
Owning the land that the yard operates on is not always possible, so leasing becomes a necessity. However, that should not deter ownership from pursuing other real estate property as an additional form of supplementing the investment portfolio.
With the U.S. tax laws in place today for both commercial and residential property, it makes sense to considerably weigh the tax reduction opportunities that exist and could be available to enhance the recycling company’s net earnings.
In the United States, we’re witnessing, more often than not, the creation of an LLC to acquire those investment properties, with the ownership of the LLC being held by a C-Corp. In doing so, the net real estate losses, mostly attributed to accelerated depreciation being utilized, could then perhaps be available to offset tax liabilities accruing from the taxable profits of the recycling operations.
Passive income loss limitations could come into play, so it’s best to have an active role in the management of the properties within the boundaries of the investment portfolio. Active management entails ongoing involvement in marketing, cash management of income and expenses, the supervision of a property administrator, etc.
Although tax laws vary from nation to nation, and the tax savings resulting from ownership of income-producing real estate may or may not be available or may be minimal in many other countries, it’s a pretty safe assumption that, over the long haul, real estate property values have a pattern of appreciation, no matter what part of the globe the property is located in. This also assumes a free market enterprise without government intervention and control of the market.
So from the standpoint of wealth accumulation diversity, investing a portion of the net operating profits of an auto recycling operation on a sustained basis has significant merit, no matter the geographical location. This again assumes a free market.
We encourage those interested in this concept to explore the viability with their existing tax, financial and legal counsel to determine if this particular approach to their wealth accumulation makes sound economic sense, both short and long-term.
While we do believe strongly that the concept of income-producing real estate ownership can augment one’s goal of attaining financial independence in an accelerated fashion, we don’t pretend to or promote ourselves as financial or tax experts in this field.
As mentioned, we have only witnessed and/or observed others experience success in realizing sustained equity growth through real estate ownership. To that extent, we are suggesting that our readers possibly explore real estate buying as a means by which to supplement existing investment portfolios. However, just to be quite clear, the material in this article should not be construed as investment, financial, legal and or tax advice.
See Robert’s previous article on Auto Recycling World – Wealth accumulation strategies for today’s auto recycler