Tax Planning Strategies/CPA Help

[Tim Albright]

Greetings,

My wife and I are just flirting with the idea of jumping into real estate investing. I am retired and working on career #2. We have three children; two in college, one leaving for college next year. All of their college costs are saved for. 

For purposes of context, we have a net income of +/- $525k/year. Income is born from defined benefit retirement pensions ($250k/annually with 3% annual COLA) and the remainder is from W2 employment for my wife and I. We have approximately $475k equity in our primary residence (2.5% rate for 11 more years - $850k value). We have various investments (403b, 457b, Roth IRA's, 529). Other than our home, we have no debt.

Our largest issue (and I understand how fortunate we are so not complaining...too much), is the enormous amount of taxes we pay. We live in California and the income does not allow for many deductions (no deductions for kids, no education deductions, minimal interest on mortgage, etc.). We are looking to begin this process with the primary motivating factor of reducing our tax liability and then creating some generational wealth for our kids. Secondarily, if we can have a year wherein we can significantly decrease our tax liability thought REI, we would use that year to convert some of our tax deferred investments (403b, 457b) to in-plan Roth conversions and pay the taxes on those conversions - hoping that makes sense.

We are open to STR, MTR, LTR - we just want to make a wise decision that lowers our tax liability. While we would like to cashflow at some point, we recognize that is likely downstream. We would like to grow our portfolio as time, finance, and opportunity allow.

Lastly, our oldest is headed to UConn for her PhD (6 years) and instead of paying to rent, our thoughts are to do a version of a house hack with buying a house/condo with her living there and then renting out one to two rooms to offset the costs of her rent. We also have a son that will be going to the University of Arizona and our thoughts, assuming this is a wise choice, is to do the same there. If we have to pay for housing anyway, we might as well make the most of it. We do, however, understand that renting to undergrads comes with a risk of what goes on in an undergrad house. Perhaps my son being one of the tenants will help to mitigate the damage? :)

So I am looking for any advice and/or connection to a CPA/Tax Planning Consultant who is familiar with this space. Not looking for free advice, but reliable advice and an ongoing relationship as we travel this path. 

Thank you in advance.

Tim and Kristina

[Sean O'Keefe]

Quote from @Tim Albright:

Greetings,

My wife and I are just flirting with the idea of jumping into real estate investing. I am retired and working on career #2. We have three children; two in college, one leaving for college next year. All of their college costs are saved for. 

For purposes of context, we have a net income of +/- $525k/year. Income is born from defined benefit retirement pensions ($250k/annually with 3% annual COLA) and the remainder is from W2 employment for my wife and I. We have approximately $475k equity in our primary residence (2.5% rate for 11 more years - $850k value). We have various investments (403b, 457b, Roth IRA's, 529). Other than our home, we have no debt.

Our largest issue (and I understand how fortunate we are so not complaining...too much), is the enormous amount of taxes we pay. We live in California and the income does not allow for many deductions (no deductions for kids, no education deductions, minimal interest on mortgage, etc.). We are looking to begin this process with the primary motivating factor of reducing our tax liability and then creating some generational wealth for our kids. Secondarily, if we can have a year wherein we can significantly decrease our tax liability thought REI, we would use that year to convert some of our tax deferred investments (403b, 457b) to in-plan Roth conversions and pay the taxes on those conversions - hoping that makes sense.

We are open to STR, MTR, LTR - we just want to make a wise decision that lowers our tax liability. While we would like to cashflow at some point, we recognize that is likely downstream. We would like to grow our portfolio as time, finance, and opportunity allow.

Lastly, our oldest is headed to UConn for her PhD (6 years) and instead of paying to rent, our thoughts are to do a version of a house hack with buying a house/condo with her living there and then renting out one to two rooms to offset the costs of her rent. We also have a son that will be going to the University of Arizona and our thoughts, assuming this is a wise choice, is to do the same there. If we have to pay for housing anyway, we might as well make the most of it. We do, however, understand that renting to undergrads comes with a risk of what goes on in an undergrad house. Perhaps my son being one of the tenants will help to mitigate the damage? :)

So I am looking for any advice and/or connection to a CPA/Tax Planning Consultant who is familiar with this space. Not looking for free advice, but reliable advice and an ongoing relationship as we travel this path. 

Thank you in advance.

Tim and Kristina

There are a few that commented on this other thread you start https://www.biggerpockets.com/forums/51/topics/1197883-capit...

& 20 + commenting in this forum. Reach out to one you think is a good fit and answered questions similar to your situation.

[Basit Siddiqi]

I wouldn't invest in an area just because you have a child going to school nearby.
They will only be in school for a couple of years and then you have a rental 100%

Who will be managing the property - Will it be you or will it be your child?
If it is your child, it may be good for them to learn but also may be a burden as they try to pass school. You should have a conversation with them if that is something that interests them.

If you will manage the properties and you have the properties across different areas/schools, there is little scaling and you would need to look for multiple connects(contractors, vendors, etc)

Best of luck.

[Jake Andronico]

@Tim Albright

What a great problem to have :) But, it's something I hear all of the time. Especially from CA, and when you're in it it can feel very frustrating. 

I'm just over the hill in Reno, NV (moved from Marin County) and a lot of parents in the area do the same thing w/ student rentals near UNR. My family and I have been investing here focusing on them for years. Happy to share the pros and cons we've experienced over the years.

Not sure how much capital you're looking to deploy, but it sounds like it's maybe possible you could potentially get into the small multifamily space. 

I'm not a CPA (although I do know a great one that specializes in RE specifically) but you can run a cost segregation study to accelerate depreciation into the first year to help on taxes (although this is phasing out, but can still be powerful), and may help with your plan to do Roth conversions. 

I'll shoot you a PM. 

[Katie Balatbat]

@Tim Albright

Couple of other things to add to what others have told you - I'm not sure of your net worth currently, or what you expect it to grow to over the coming years.  But, assuming you have a decent net worth (congrats on all of your successes thus far!), you may also want to consider estate planning and/or gift planning while we're in a high estate tax exemption environment before the sunset in 2026.

As to the income tax planning, most of the time the tax "savings" come by way of depreciation.  That's not to say that there aren't other ways to reduce taxes, and one of any of the several well-qualified CPAs on this forum can assist with their ideas and suggestions for you.

If you need suggestions in the San Diego area, feel free to reach out.

*This post does not create an attorney-client or CPA-Client relationship.  The information contained in this post is not to be relied upon.  Readers are advised to seek professional advice.

[Account Closed]

Quote from @Tim Albright:

Greetings,

My wife and I are just flirting with the idea of jumping into real estate investing. I am retired and working on career #2. We have three children; two in college, one leaving for college next year. All of their college costs are saved for. 

For purposes of context, we have a net income of +/- $525k/year. Income is born from defined benefit retirement pensions ($250k/annually with 3% annual COLA) and the remainder is from W2 employment for my wife and I. We have approximately $475k equity in our primary residence (2.5% rate for 11 more years - $850k value). We have various investments (403b, 457b, Roth IRA's, 529). Other than our home, we have no debt.

Our largest issue (and I understand how fortunate we are so not complaining...too much), is the enormous amount of taxes we pay. We live in California and the income does not allow for many deductions (no deductions for kids, no education deductions, minimal interest on mortgage, etc.). We are looking to begin this process with the primary motivating factor of reducing our tax liability and then creating some generational wealth for our kids. Secondarily, if we can have a year wherein we can significantly decrease our tax liability thought REI, we would use that year to convert some of our tax deferred investments (403b, 457b) to in-plan Roth conversions and pay the taxes on those conversions - hoping that makes sense.

We are open to STR, MTR, LTR - we just want to make a wise decision that lowers our tax liability. While we would like to cashflow at some point, we recognize that is likely downstream. We would like to grow our portfolio as time, finance, and opportunity allow.

Lastly, our oldest is headed to UConn for her PhD (6 years) and instead of paying to rent, our thoughts are to do a version of a house hack with buying a house/condo with her living there and then renting out one to two rooms to offset the costs of her rent. We also have a son that will be going to the University of Arizona and our thoughts, assuming this is a wise choice, is to do the same there. If we have to pay for housing anyway, we might as well make the most of it. We do, however, understand that renting to undergrads comes with a risk of what goes on in an undergrad house. Perhaps my son being one of the tenants will help to mitigate the damage? :)

So I am looking for any advice and/or connection to a CPA/Tax Planning Consultant who is familiar with this space. Not looking for free advice, but reliable advice and an ongoing relationship as we travel this path. 

Thank you in advance.

Tim and Kristina

 Hello Tim, 

You are in the right place! If you play your cards right with real estate you can reduce your tax bill significantly. I would first start looking at the various strategies for saving massively on tax, mainly the short term rental loophole and real estate professional status and then decide if these strategies align with your goals. Once you understand these strategies and have identified with one as a fit for you, then you can connect with someone who is experienced in implementing that strategy here on BP. Congrats on the current success! 

[Bill Hampton]

@Tim Albright

I recommend finding an accountant who specializes in real estate taxation. You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

Good luck.

[Kory Reynolds]

With those stats, you'll pull half the accountants in the forum out of the woodwork, most of us would be more than happy to work with someone in your financial position as it means we can provide a fair amount of value.

Whoever you work with, I would recommend you consider finding a firm with substantial experience to offer in both real estate, and estate/gift planning given your goals..  Given the size of the income you are working with in semi-retirement, one would assume that you do have substantial capital to work with, or at the very least can accumulate it fairly quickly, so on top of just real estate tax savings strategies, you would also likely benefit from a team who has subject matter experts in estate and gift planning.  Your journey is two part - accumulate more wealth, and then how you are going to move it onto your kids - both have substantial tax planning opportunities.

Given you mentioned your primary motivation is taxes, a HUGE caveat you should keep in mind is that no matter what real estate investment you make, first and foremost it should make good business sense.  Tax benefits should be #2 on the list.  Tax benefits can help make a better business deal, but a bad business deal is hardly ever going to break even just because of tax benefits.

The other big consideration you should have, in order to actually benefit from real estate fueled losses or credits, it will require a substantial investment of time - either to get over the material participation thresholds for short term rentals, or to get over the real estate professional thresholds for mid term /  traditional rentals.  The point here is - it isn't just buy some rentals and get a third party property manager, in order for you to get the direct tax benefits against your pension / W-2 income, you could readily be required to invest anywhere from 100-750 hours per year.  If you are looking for a new activity, perfect.  

If you aren't looking to invest that kind of time, then perhaps you can still benefit with the leveraged returns you receive through real estate investment as a passive investor that can be tax advantaged, but the related losses won't be able to offset W-2 / Pension / Retirement Distribution / Roth Conversions / Etc.

Another consideration - do your kids have an interest in real estate?  It happens so often (but not every time!) that an older generation spends years accumulating real estate, they pass away....and then the next generation just sells all of it immediately since they don't want to deal with it.  Still not a bad way to get some leveraged returns that you pass on to your kids, but ensure that you find enough value in it while you are putting all this work in.

[Annie Seurer]

Quote from @Tim Albright:

Greetings,

My wife and I are just flirting with the idea of jumping into real estate investing. I am retired and working on career #2. We have three children; two in college, one leaving for college next year. All of their college costs are saved for. 

For purposes of context, we have a net income of +/- $525k/year. Income is born from defined benefit retirement pensions ($250k/annually with 3% annual COLA) and the remainder is from W2 employment for my wife and I. We have approximately $475k equity in our primary residence (2.5% rate for 11 more years - $850k value). We have various investments (403b, 457b, Roth IRA's, 529). Other than our home, we have no debt.

Our largest issue (and I understand how fortunate we are so not complaining...too much), is the enormous amount of taxes we pay. We live in California and the income does not allow for many deductions (no deductions for kids, no education deductions, minimal interest on mortgage, etc.). We are looking to begin this process with the primary motivating factor of reducing our tax liability and then creating some generational wealth for our kids. Secondarily, if we can have a year wherein we can significantly decrease our tax liability thought REI, we would use that year to convert some of our tax deferred investments (403b, 457b) to in-plan Roth conversions and pay the taxes on those conversions - hoping that makes sense.

We are open to STR, MTR, LTR - we just want to make a wise decision that lowers our tax liability. While we would like to cashflow at some point, we recognize that is likely downstream. We would like to grow our portfolio as time, finance, and opportunity allow.

Lastly, our oldest is headed to UConn for her PhD (6 years) and instead of paying to rent, our thoughts are to do a version of a house hack with buying a house/condo with her living there and then renting out one to two rooms to offset the costs of her rent. We also have a son that will be going to the University of Arizona and our thoughts, assuming this is a wise choice, is to do the same there. If we have to pay for housing anyway, we might as well make the most of it. We do, however, understand that renting to undergrads comes with a risk of what goes on in an undergrad house. Perhaps my son being one of the tenants will help to mitigate the damage? :)

So I am looking for any advice and/or connection to a CPA/Tax Planning Consultant who is familiar with this space. Not looking for free advice, but reliable advice and an ongoing relationship as we travel this path. 

Thank you in advance.

Tim and Kristina

If you decide to go the STR route to take advantage of the tax loophole, I highly recommend reaching out to John Bianchi and Taylor Jones with STR Search - they are experts in the space and have helped hundreds in your position. Feel free to DM me and I can connect you via email.

[Michael Smythe]

@Sean O'Keefe someone needs your help!

[Noah Laker]

Hey Tim, not a CPA but I am a broker here in Sacramento and I manage 100+ STR properties. At least half of my clients are high-income W2 earners who are interested in the tax advantages of STR + REP Status + Cost Segregation. I personally save a fortune on taxes and my clients do very well with this strategy. Highly recommend! I'll shoot you a DM.

[Scott Scoville]

Quote from @Tim Albright:

Greetings,

My wife and I are just flirting with the idea of jumping into real estate investing. I am retired and working on career #2. We have three children; two in college, one leaving for college next year. All of their college costs are saved for. 

For purposes of context, we have a net income of +/- $525k/year. Income is born from defined benefit retirement pensions ($250k/annually with 3% annual COLA) and the remainder is from W2 employment for my wife and I. We have approximately $475k equity in our primary residence (2.5% rate for 11 more years - $850k value). We have various investments (403b, 457b, Roth IRA's, 529). Other than our home, we have no debt.

Our largest issue (and I understand how fortunate we are so not complaining...too much), is the enormous amount of taxes we pay. We live in California and the income does not allow for many deductions (no deductions for kids, no education deductions, minimal interest on mortgage, etc.). We are looking to begin this process with the primary motivating factor of reducing our tax liability and then creating some generational wealth for our kids. Secondarily, if we can have a year wherein we can significantly decrease our tax liability thought REI, we would use that year to convert some of our tax deferred investments (403b, 457b) to in-plan Roth conversions and pay the taxes on those conversions - hoping that makes sense.

We are open to STR, MTR, LTR - we just want to make a wise decision that lowers our tax liability. While we would like to cashflow at some point, we recognize that is likely downstream. We would like to grow our portfolio as time, finance, and opportunity allow.

Lastly, our oldest is headed to UConn for her PhD (6 years) and instead of paying to rent, our thoughts are to do a version of a house hack with buying a house/condo with her living there and then renting out one to two rooms to offset the costs of her rent. We also have a son that will be going to the University of Arizona and our thoughts, assuming this is a wise choice, is to do the same there. If we have to pay for housing anyway, we might as well make the most of it. We do, however, understand that renting to undergrads comes with a risk of what goes on in an undergrad house. Perhaps my son being one of the tenants will help to mitigate the damage? :)

So I am looking for any advice and/or connection to a CPA/Tax Planning Consultant who is familiar with this space. Not looking for free advice, but reliable advice and an ongoing relationship as we travel this path. 

Thank you in advance.

Tim and Kristina

Hey Tim, sounds like you have a great problem on your hands:-) I'm currently working with other high W2 earners with a similar agenda. I'm a local investor and investor friendly real estate agent. I'd be happy to jump on a call to hear more about your goals. I'll DM you my info.