What strategy for 300K?

Question

Would love to get seasoned investors' advice on how they would solve this investment/tax challenge: I am about to transfer 300k from a retirement vehicle so that I can use the money to retire early. It is money I can take out early and avoid the penalty because of a divorce but it has to go to a personal bank account and it has to come to me in a lump sum. My goal is to put it into an investment that will depreciate enough in the first year to cover taxes at ordinary income rate on 300k.

The ultimate goal is to work toward 10K/month net passive income.

I realize I will get several different answers which is exactly what I'm looking for--to see all sides of the cube. Thank you in advance.

The ultimate goal is to work toward 10K/month net passive income.

I realize I will get several different answers which is exactly what I'm looking for--to see all sides of the cube. Thank you in advance.

Alex Hunt · Answer

Buy a variety of asset class/ unit count properties. Either buy all cash and do a cash purchase refi immediately and move the funds to the next purchase. Or use the $300k as the typical 20% down, would give you $1.50 million in buying power. The mortgages and closing expense can be written off to eliminate the taxes as you want

Forest Wu · Answer

Maybe she could also do a cost seg and take some bonus depreciation on top of all of this.

Julio Gonzalez · Answer

@Forest Wu Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions!

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq

Arn Cenedella · Answer

@Jennifer Taylor

Small world, I live in Greenville SC also and invest in Multifamily properties via syndication.

We do cost segregation on all our deals and typically we find an investor gets depreciation equal to 35% to 40% of the amount invested.

So $300,000 invested might generate $100,000 to $120,000 in depreciation.

The big question is this depreciation loss is considered a passive loss and generally can only be used to offset passive income.

You need to find out whether withdrawal from an IRA is considered passive income.

You need to find out can the depreciation be used to offset the income from early withdrawal?

I don’t know the answer to that question. Ask your CPA.

If yes, then we can help.

We only invest in Greenville County which you as a resident know is BOOMING.

Let’s us know how we can help.

Arn

Bill Hampton · Answer

@Jennifer Taylor

I recommend finding a tax strategist who specializes in real estate taxation and tax planning. You may want to consider working with your tax strategist remotely to expand your options.I would also recommend looking for a tax strategist willing to work with you throughout the year, not just when preparing your tax return. You want an accountant/advisor who can help you strategize and who is responsive when you want to know the tax consequences of the decisions you are making throughout the year.Good luck in your search.

Robert Rixer · Answer

Crunching rough numbers you need a significant percentage of depreciation in that first year to offset not only your tax liability but also the income of the property. Look into Cost Segregation and talk to a professional. It allows you to front-load depreciation way faster than the standard 39 year straight line.

Jennifer Taylor · Answer

Thanks!

Jack Martin · Answer

@Jennifer Taylor keep in mind, some properties will garner significantly more tax benefit than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested (or more) even in years where the benefit begins to sunset. In other words, you may be able to achieve 100% (dollar-for-dollar) coverage from an investment in the right kind of property.

A few words of caution:

- Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit.

- If you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us.

All the best,

Jack

Jennifer Taylor · Answer

Any suggestions?

I've thought about buying a warehouse but then I have the problem of how to make the warehouse earn money. There is a chicken/egg problem there because you need the business to need the warehouse and you need the warehouse to have the business.

Also, I've thought about finding an accredited investor who would put the money into an oil well on my behalf. I've also thought about buying several single family homes, renting them out, and doing a cost-segregation.

What strategy for 300K?

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