Tax Strategies When MAGI Exceeds $150,000

[Chris Herring]

Hello, 

I'm a long time lurker but I believe this is my first post.  While I have upcoming meetings with a real estate CPA, attorney, and a financial planner I want to reach out and see if anyone has some insight.

My business partner and I will be purchasing our first rental property this year and could purchase as many as 3 this year. The purchases will be local to us. We're both using HELOC's and expect to be able to cover the cost of the purchase and repairs to our rental property. We plan to utilize the BRRR strategy and intend to force equity. The property will be moved into an LLC. Our rental portfolio is intended to be a long-term buy and hold. We intend to put in some sweat equity on the properties and it's reasonable to expect we could put in 100+ hours each into our real estate investment this year. We also intend to have the property management company I work for manage the property while it's occupied.

My household income exceeds a MAGI of $150k.  I work for a property management property and am a salaried employee.  My day-to-day role is in our brokerage team as a project manager.  I work with our investor clients to write the scope of work, obtain estimates, and oversee the rehab process.

My business partner also likely has a MAGI that exceeds $150k or is at least above $100k.  He works in an unrelated field. 

We both intend to keep our fulltime jobs for the foreseeable future.

I attended BPCON 2023 and attended the panel How To Eliminate Your Taxes–Legally!  Among the topics they discussed included the material participation tests, including the 100 hour participation test.  My understanding of the material participation tests is pretty basic.  

So I have a few questions I hope you can help me with:

1.  If you've been in a similar situation, how did you approach it?  How did you approach depreciation?

2.  If both my partner and I can put more than 100 hours individually into our investments this year, but less than 500 hours, could one of us inadvertently cause the other not to meet the material participation test.  To expand a bit, lets assume we're both working on the same property. Partner A puts in 120 hours and Partner B puts in 101 hours.  Would we both meet the 100 hour material participation test?  If not, would we both meet the 100 hour test if we put in an equal amount of hours (say 120 each)?

Thanks in advance for your responses.

Chris

[Basit Siddiqi]

There are still benefits of having rental properties if your income is above $150,000.

If you are a joint filing and living in Indiana, it is a good chance that your tax rate is atleast 29%(24% Federal and around 5% for indiana).

If you get $3,600 of cash flow($100 per door per month x 3 properties), that is approximately $1,200 of taxes that you don't have to pay because it will likely be shielded by depreciation.

More properties, more years, and you will have earned a lot of rental income tax free.

It is a whole different conversation if you want to offset rental losses against other forms of income such as W-2.