Seeking Tax Reduction Strategies for High-Income Household with LTR Focus

[Ray White]

Hello BiggerPockets community,

My wife and I have a combined W-2 income of approximately $550K, supplemented by $100K in stock grants annually. The income distribution is roughly 60/40 between us. We’re long-term rental property owners, with a condo we’ve owned since 2009 and rented out since 2013. It’s currently rented for $2,200/month, with a mortgage and HOA fees totaling $1,900/month. The condo’s value is around $550K, and we have a remaining mortgage of about $200K.

Our primary residence is valued at approximately $2M, with a $1M mortgage. Residing in high-tax New Jersey and working remotely, we’re exploring strategies to reduce our overall tax burden.

While I'm intrigued by the short-term rental strategy, my preference leans towards LTR due to familiarity. We're also considering purchasing another LTR near Disney to eventually enjoy with our newborn—a celebration of sorts for future family vacations. STR are not allowed in the community. However, the financials seem challenging, and I'm seeking advice to make this viable without significant monetary loss.

As a side note, I’m quite the handyman—think ‘handyman on steroids’—so I’m open to properties that require some elbow grease.

Any strategies or insights from the community would be greatly appreciated!

[Greg Scott]

I'm going to give you some answers you may not like, and hopefully some that will help.  

Sell your condo. $300/mo in cash flow on $350K in equity means you are getting only a 1% return on your equity. (And that assumes your HOA is very well run and you are not surprised by any special assessments.) I have invested in several syndications in the past 12 months that are kicking off a 5% cash on cash return on my investment. I regularly see single family houses that kick off 20% cash on cash returns. Also because your LTV is low, you have a relatively small amount of depreciation write-off to help with your taxes. Imagine how much better it would be to put $5K every month in your pocket (tax free) instead of $300. This investment is giving you TERRIBLE returns.

If working remotely, could you sell your home and move to another state?  That would save you a ton on income taxes. It would also free up a lot of capital for other activities.  What if you took $500K and bought a really nice home elsewhere and took $500K and invested it.  That $500K could easily kick out another $5K in tax-free income per month.

Combing the above two paragraphs $10K per month in tax-free income is the equivalent of $200K in W2 (highly-taxed) income.

Mixing vacation dreams and investing usually sub-optimizes both. What if the better investment deal was in Atlanta?  Long ago we decided to focus our investing on getting great returns. We can afford to vacation wherever we want. Please rethink your focus on buying near Disney just because it is near Disney.

I congratulate you for being a high income professional. If you had low income and low net worth, I would say it makes a lot of sense for you to take on a lot of handyman jobs on your property. Is cleaning up garbage, scrubbing toilets, fixing broken sinks, carpentry or any of those the highest & best use of your time? I suspect you would go much further, faster, if you take on the tasks that add the greatest value. What if you got more education, attended a mastermind, or focused on meeting with brokers or networking with successful investors. Those all probably have a higher ROI for you.

If you really want to get to financial freedom, keep building your passive income streams.  Once your income stream exceeds the after-tax income of the lowest-paid spouse, consider having them focus on just investing so they can become a real estate professional.  That unlocks more tax benefits than you can imagine.  My wife and I currently make more money than we did in our corporate careers but (legally) have not paid any federal income tax in several years.  Go look at your latest tax return and see how much you gave away to both federal and state governments. By doing those things incentivized in the US tax code, it is possible to keep all your income, and that is life-changing.

Making the right choices, you could be financially free in less than 5 years, but you are not headed that direction.