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Going to try my hand at the long form thread - very open to ideas and feedback:
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This is what I am starting to do in my life, and a great tax strategy for business owners and even high income W-2 folks.
Here’s how and why: https://twitter.com/baldridgecpa/status/1316020221337952256
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This is what I am starting to do in my life, and a great tax strategy for business owners and even high income W-2 folks.
Here’s how and why: https://twitter.com/baldridgecpa/status/1316020221337952256
If you are a high earning individual with a job or business you are not able to take passive real estate losses.
As a single person that makes 200k, you would not be able to deduct losses generated by your rent house, building, etc. against ordinary earnings.
As a single person that makes 200k, you would not be able to deduct losses generated by your rent house, building, etc. against ordinary earnings.
If you want that sweet tax deduction you need to become a pro - how do you do that? Pass the real estate exam?
Not necessarily. The IRS defines a real estate pro as someone who BOTH
Not necessarily. The IRS defines a real estate pro as someone who BOTH
1. Spends more than 750 hours in real property business. (11 types of activities)
2. Spends more than 1/2 their time in businesses where the taxpayer materially participates
2. Spends more than 1/2 their time in businesses where the taxpayer materially participates
Being a pro isn’t enough. You must also materially participate in the business.
Material participation is defined as being involved in the operations of the activity on a regular, continuous, and substantial basis.
There are 7 tests of which you must pass 1.
Material participation is defined as being involved in the operations of the activity on a regular, continuous, and substantial basis.
There are 7 tests of which you must pass 1.
This is to ensure you spend a substantial amount of time on these entities.
Generally I find once you meet the pro test the material participation comes along for the ride.
Generally I find once you meet the pro test the material participation comes along for the ride.
The partner I learned under always said 3 rent houses was his cutoff to be a pro. You may be able to get away w 1-2 big buildings.
An RE or broker license may help your case - if you have a spouse who doesn’t work get licensed and work in the business that can be even better.
An RE or broker license may help your case - if you have a spouse who doesn’t work get licensed and work in the business that can be even better.
Great - now you are a pro. You can deduct losses against your active business or W-2 earnings.
Now start to use leverage and cost segregation in your favor to push down your taxable income.
Leverage - borrow money on the property to create more basis through qualified debt.
Now start to use leverage and cost segregation in your favor to push down your taxable income.
Leverage - borrow money on the property to create more basis through qualified debt.
Cost seg - break the building asset down into small components to expedite the depreciation - sometimes 30-40% of the building value year 1.
This allows you to take losses above and beyond the cash invested in the property.
Money that won’t be paid for years deducted today!
This allows you to take losses above and beyond the cash invested in the property.
Money that won’t be paid for years deducted today!
A cash flowing property now creates huge losses used against other gains, normal business income or carried forward (or sometimes back) to other tax years.
This can be done several times over in your most productive tax years as a tax deferred retirement vehicle of sorts.
This can be done several times over in your most productive tax years as a tax deferred retirement vehicle of sorts.
Combined with 1031 exchanges the basis can be rolled into other assets and the gains deferred for years (or forever at death)
The concept can work with farm land and minerals as well with depletion.
You can still 1031 O&G property even after TCJA
https://bit.ly/3jexQOj
The concept can work with farm land and minerals as well with depletion.
You can still 1031 O&G property even after TCJA
https://bit.ly/3jexQOj
You can even further optimize on the sale of the property in a few ways.
1. You can allocate the sale price the same way you cost segregated the purchase. As the underlying value of the land goes up, you might suffer less recapture of depreciation on the sale of the asset.
1. You can allocate the sale price the same way you cost segregated the purchase. As the underlying value of the land goes up, you might suffer less recapture of depreciation on the sale of the asset.
2. Sell in an installment sale and hold the note. This will allow you to generate an annuity from the note and recognize the gain on sale over time as the note principal is paid down.
There are even ways to avoid refinance that would trigger the gains and structured sales.
There are even ways to avoid refinance that would trigger the gains and structured sales.
3. Don’t sell the asset and enjoy the income production and cash of renting it as a pension. Your heirs can get a step up in basis when you die.
Given all that real estate can be a fantastic place to defer income to retirement with leverage.
If your business is paying rent it can be a no brainer.
If your business is paying rent it can be a no brainer.
This has taken a few concepts from other posts and tried to layer them in, along with some of my take on it.
See Nick’s posts below that are required reading. https://twitter.com/sweatystartup/status/1294667715492413442
See Nick’s posts below that are required reading. https://twitter.com/sweatystartup/status/1294667715492413442
Point of clarification. You can have a w-2 and concurrently be an RE pro.
The work you do as a w-2 employee doesn’t count if you aren’t a 5% owner.
Regarding the time spent to qualify the safest way to be certain is to keep a time log..
The work you do as a w-2 employee doesn’t count if you aren’t a 5% owner.
Regarding the time spent to qualify the safest way to be certain is to keep a time log..
