Tax-Efficient Strategies for High-Net-Worth Investors Using Trust Deeds

After all, high-net-worth investors understand that for protection and growth of wealth, it will be important to be tax-efficient. It is not about returns earned but actually how much of those returns one keeps after taxes. Among these, one of the fastest-growing in popularity for the savvy investor is the trust deed as investors continue to seek out tax-efficient investment opportunities. Offering a unique way to build wealth strategically, trust deeds have the potential for strong returns with advantageous tax benefits.

Why Trust Deeds Are Attractive for High-Net-Worth Investors

Before we get deep into the tax strategies relating to trust deeds, the best way to start this discussion is with a quick overview of what exactly makes trust deeds so alluring to the high-net-worth investor. A trust deed, in basic terms, is a type of loan that is secured by real estate. It may be in the form of a short-term loan for property development or renovation projects. You, as the investor, are lending money to a borrower wherein real estate property is the collateral to hold against your investment. That in itself adds a little more security to the investment you will be making.

Trust deeds have several advantages that match the aims which the high-net-worth investor could think of, including:

• Periodic returns: In trust deeds, an investor has the opportunity to receive monthly or quarterly interest. This is good for investors whose aim is a high income.

• Asset-backed security: This investment is generally less volatile, since it is secured by real estate, compared to stocks and other high-risk assets.
• Smaller commitment: Most trust deeds have 6- to 24-month terms, offering more flexibility for investors than longer-term real estate holdings or other illiquid investments.
  
  While those are all attractive features, for high-net-worth investors, the real draw comes with some of the tax benefits that can be realized through trust deed investments.
  Let’s take a closer look at some of the most powerful tax-efficient strategies to optimize your trust deed investments.

1. Invest Through Tax-Advantaged Accounts
   One of the easiest ways to make your trust deed investments tax-efficient is by utilizing tax-advantaged accounts, such as a Self-Directed IRA. With the Self-Directed IRA, you’ll be able to invest in alternative assets-including trust deeds-and defer taxes on income you incur within the account. In this way, your investment can grow uncompromised by annual tax liabilities, hence enabling compounding returns over time.

In a Roth Self-Directed IRA, you invest your after-tax dollars, and all future gains and withdrawals are tax-free, so long as you follow the rules set forth by the IRS. This might be a very potent tool for large investors in the context of long-term tax planning and retirement savings. Your trust deed investments will be shielded in tax-advantaged accounts from income that would otherwise be derived from current taxation, thereby improving your wealth-building strategy.

2. Consider Structuring as a Passive Activity
   Yet another tax-efficient strategy for trust deed investors is structuring the investment to be viewed as a passive activity. The IRS defines passive income as the income derived from investments in which an investor does not materially participate in the day-to-day management of the investment. Trust deeds, since they are debts, typically would fall within this category.

For example, passive income from trust deeds can offset passive losses in other areas of your investment portfolio for a tax advantage. In other words, if you have other passive real estate investments that are losing-for instance, depreciation on rental propertiesthose can offset the income from your trust deeds and lower your overall taxable income.

This is particularly helpful to high-net-worth investors who have a diversified real estate portfolio, as they will strategically balance income and losses across different asset classes.

3. Reinvest Gains through 1031 Exchange
   While these are primarily used in property investments, a 1031 exchange can be used in certain trust deed investments where the loan is tied to real property. As with any 1031 exchange, this allows you to defer capital gains on a property sale-or in this case, the qualified real estate-based loan-reinvested into a like asset.

In a case where a trust deed investment matures and you reinvest in another trust deed, you can execute a 1031 exchange and defer the taxes on the gain of the first investment. This will be advantageous for the high-net-worth investors seeking to grow their portfolios over time without taking a hit from capital gains at each different step.

It is best to consult with a tax advisor to see whether this strategy is available with your specific trust deed investments, and that all IRS rules are being satisfied.

4. Strategize with the Depreciation Benefits
   Investors in trust deeds that involve an ownership interest, or which are specially structured to provide property depreciation through to the investor, can find depreciation to be a strong tax benefit. In those cases where there is equity participation in the real estate asset in the trust deed investment, depreciation of the property can be passed through to the investor. With depreciation, you are able to cut down your taxable income by a fair portion of the property value each year, even though the property as a whole may appreciate.

Depreciation can offset some of the income that results from the trust deed, reducing the overall tax burden. It can be of great service, especially to high-net-worth investors, in their search for extra tax relief who would welcome a debt-equity mix in the trust deed investments they make.

5. Invest in States With Favorable Tax Treatment
   Another often overlooked tax strategy pertains to choosing the trust deed investment according to states that have friendly state income tax treatment. Some states have lower or no state income taxes. These can become a factor when you are dealing with sizable investments. Real estate-backed loans in such states will give an advantage to the investor in high-tax states in that they can retain more of their returns.

Thus, wealthy investors can consider any opportunities available in Florida or Texas, states with more favorable regulations, for tax efficiency in their trust deed portfolios, with the help of a fund manager or an advisor.

6. Timing for Tax Planning
   Another influencing factor in the tax efficiency of a trust deed investment could be the timing of its start and end. Because the income from the trust deeds is usually earned on a monthly or quarterly basis, you could time your investments to minimize your current year’s tax liability. A simple example could be that closing a trust deed investment in January instead of December may shift the tax liabilities into the following year, thus allowing for more prudent planning.

At LBC Capital Income Fund, LLC, we work closely with our investors to help identify timing strategies that make a difference, especially as tax laws evolve. Knowing when to realize income can be just as important as choosing the right investment.

Why the LBC Capital Income Fund, LLC Income Fund Stands Out for the High-Net-Worth Investor

At LBC Capital Income Fund, LLC Income Fund, we believe that high-net-worth investors respect tax efficiency no less than great returns. Through debt fund investments in trust deeds, our accredited investors can tap into a carefully assembled portfolio of loans secured by real estate, with options for tax-advantaged structures.

What makes us unique is:

• Tax-Efficient Structure Expertise: Our team has a great deal of experience structuring trust deed investments for optimal tax benefits. From guidance on how investors should take benefits through tax-advantaged accounts to minimizing exposure, we are here to guide you.
• Diversified Real Estate Portfolio: We focus on loans backed by high-quality real estate across favorable markets, making sure our investors benefit from a diversified approach.
• Consistent Returns with Low Taxes: Our fund generally yields returns in the range of 8-10%, ensuring that the investors will get a good, consistent income while trying to reduce the after-tax impact through a variety of strategies.

Trust Deeds for Tax Efficiency in Wealth Creation

Tax efficiency is, no doubt, important to any investment approach for a low or high-net-worth investor. Trust deeds bring you a unique blend of steady income, asset-backed security, and opportunities for tax planning that could help you maximize your wealth-building efforts. Just a few ways that you may let the trust deed investments work smarter for you are Self-Directed IRAs, passive activity designation, and depreciation.

At LBC Capital Income Fund, LLC Income Fund, we’re here to guide you through the intricacies associated with trust deed investing and have tax-efficient options available for high-net-worth investors. Interested in how trust deeds can align with your tax strategy? Then reach out to us to explore possibilities.