High Net Worth Individuals - Tax Advantages/Best Practices?

Question

Question is for folks that are 150K in earnings and investing in Real Estate as a passive investor and NOT designated as a "real estate professional. I currently have apartment complex (MFH) in FL and about to purchase another MFH in an Opportunity Zone. I have a property management that runs this business since I have a full time job. I would LOVE to quit my job and become a real estate professional so I can write off passive losses against my income but that isn't an option.
What are some tax advantages, best practices that I should be aware of as I'm trying to lower my tax basis as much as humanly possible -Being a "high net worth individual" limits this. Any best practices would be welcome. Thank you. -Ed

Chris Salerno · Answer

Ed, I hope all is well. Congrats on buying some multi-family.

I would get in contact with ted Lanzro. He is an expert with this.

Basit Siddiqi · Answer

@Ed MoranYou are still benefiting from the tax laws eventhough you make over $150,000 and can't use the passive losses to offset your other income(assuming you have passive losses and not passive income).You are being entitled to depreciation. The cash-flow is not being taxed at the high tax rates.Furthermore, you have a large disposal of tax tricks in the event of an exit plan.

Lee Ripma · Answer

@Ed Moran

As other have said - see if your spouse can become an RE professional. If not then you can still use your losses to offset passive income so up your passive income and passive losses. Carry over losses so that you’ll be able to use them in the future. Look at ways that you can reduce your AGI. Certain retirement accounts have very high limits and can be self directed. If you can max those out you may be able to get into lower bracelets where you can take some more passive losses. Aggressively keeping your AGI down is key. Check everything I suggest with an actual attoney and tax specialist, these are just strategies I personally use/have used and is not tax or legal advice.

Also keep in mind that you’re fortunate to be in a position to have this problem. Whenever you feel angered by your high tax bill think about all the people who will never be in this position and will actually struggle with basic needs. By the very fact that you’re asking this you’re probably in the top 5%, likely higher.

If all that fails just remember why the saying “death and taxes” rings true for so many of us. For RE professionals it’s just death though ;)

Bill B. · Answer

Don’t forget. For the opportunity zone purchase to have its intended benefits you need to spend more on improvements than you did on the purchase of the MFH unit itself.

Natalie Kolodij · Answer

I just did a youtube video on this.

You need to thin about how to use those losses strategically in the future to help you grow.

If you can't use your losses year-to-year they accumulate and in the year you sell they become available for use.

Mike Dymski · Answer

If you have taxable income from your rental properties to offset, consider cost segregation on your apartment community.  @Yonah Weiss did mine.

Be sure that you and/or your CPA is using the $2,500 de minimis safe harbor for rehab and repairs.

Conservation easements are an option but those are IRS listed transactions with a lot of audit scrutiny.

The amount of taxes that many high net worth individuals pay is astronomical (40-50+%).

Jim R. · Answer

Good day Ed,

Have you visited the Real Estate CPAs website? They have a number of free resources describing tax advantages for real estate investors. Working a full time job makes it very unlikely you can qualify as a real estate professional. If you are married perhaps your wife can qualify. With 2 MFHs and if she was actively involved even with property managers she could likely qualify.

I would recommend a consult with a CPA knowledgeable in real estate to obtain their advice and guidance. Usually you can do a 15 to 30 minute phone call for free to see if the CPA can help. A formal consult and plan might cost 3K to 5K.

Also look at the website "Semi-retired MD" as two doctors describe how they qualified as real estate investors.

Daniel Bradley · Answer

That's insane. The leap from handing them to friends to Budweiser contracting him is mind-blowing.

Matt Moylan · Answer

@Ed Moran Congrats on the upcoming purchase!  I would love to connect you with someone who specializes in this space.  He and his partner have written a tremendously helpful book on this topic and can shed some light on various techniques to use.

Also, for your properties, I would suggest looking into some value add programs, if you have not. (ex: hail, solar, tenant master policy)

Feel free to reach out if you would like introductions.

Brent Shields · Answer

@Daniel Bradley His kid wanted to make plastic cups and print sayings and logos on them so he could hand them out to his friends. Then the kid ended up getting Budweiser to sign a contract to supply them with personalized cups for their events, and the business really took off from there.

High Net Worth Individuals - Tax Advantages/Best Practices?

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