Maximizing Your Tax Benefits as a Real Estate Investor: Strategies to Ask Your CPA

[Ryan Thomson]

Disclaimer: I am not a tax professional, so it's always best to consult a tax advisor for your specific situation.

Investing in real estate can bring about a lot of financial benefits, but it can also have a major impact on your taxes. Here are some of my favorite tax strategies:

Qualified Business Income Deduction (QBID)

Qualified Business Income Deduction. If you're a real estate investor, you could potentially deduct up to 20% of your rental income through QBID. This can help lower your taxable income and increase your overall profitability. You have to meet some criteria, but the first 20% of your income could be tax free.

Depreciation

This is a method of writing off the cost of your rental property over a period of time, 27.5 years for residential properties and 39 years for commercial properties. By taking advantage of depreciation, you can reduce your taxable income and keep more of your hard-earned profits.

Let's break this down. Let's say you buy a home for 300k. The land is worth 25k and the home is worth 275k. You are allowed to depreciate the cost you paid for the home (275k) over 27.5 years. 275k/27.5 = 10k. Each year you can use this depreciation to lower your taxable rental income by 10k.

If you were house hacking a duplex. You cannot depreciate your side of the unit. But you can depreciate the percentage of the square footage that is used as a rental. So at 50% of the duplex being a rental, you could reduce your taxable rental income by 5k/year (per the example above). You could also do this for bedroom rentals by taking the percentage of the bedroom rental square footage to the entire house.

Cost Segregation Study

"Cost Seg" if you want to sound cool while talking about taxes. Is that possible? This is a technique for breaking down the cost of your property into different components, such as the building structure, personal property, and land improvements. By doing this, you can accelerate the depreciation of your property and take advantage of bigger tax benefits. I bought a home for $260,000 in 2019. I just did a cost segregation study for 2022 and it will reduce my taxable income by 82k. It cost me $2,500.

As a real estate investor, it's important to understand the various tax benefits available to you.  Just remember, always consult with a tax professional for personalized advice and guidance.

[Michael Plaks]

Thank you for posting, @Ryan Thomson

While your intentions are good, this information is likely to create wrong conclusions, especially for the new investors, because it's missing the big picture.

1. QBI deduction does NOT erase 20% of your rental income. It only applies when you have net income - i.e. when you subtract all expenses from rents and still have a positive number. For the majority of landlords, there's zero net income, in fact there is a net loss, so QBI is not applicable.

2. Depreciation is not a "tax strategy." It is a required deduction. You did provide a very helpful example of how it is calculated.

3. Cost segregation is a tax strategy, but your example is misleading. In order to use cost segregation, you need to be able to take passive losses - $82k of it in your example. It only works if you have a very high rental income to offset or if you can qualify as a Real Estate Professional (people with traditional 40-hr W2 jobs cannot) or if you use STRs - short-term rentals and pass certain conditions. Here is more: https://www.biggerpockets.com/...