Strategies to reduce taxable income while deploying capital to build wealth?

[Luis Arguello]

I manage 150 units across 30 properties in Miami. I work for a single owner. We are projecting to pay taxes on $1,500,000 for this year and $2,400,000 next year. That about $500,000 in taxes this year and $800,000 next year. I wanted to get the opinion of others on what the best strategy is to deploy capital back into the properties to in order to reduce our taxable income while also continuing to build wealth. Any input would be greatly appreciated.

[Zachary Jensen]

Quote from @Luis Arguello:

I manage 150 units across 30 properties in Miami. I work for a single owner. We are projecting to pay taxes on $1,500,000 for this year and $2,400,000 next year. That about $500,000 in taxes this year and $800,000 next year. I wanted to get the opinion of others on what the best strategy is to deploy capital back into the properties to in order to reduce our taxable income while also continuing to build wealth. Any input would be greatly appreciated.

 Hey Luis! Look at real estate professional status closely, this area of the tax code(section 469) is where I think If you worked with the right real estate-focused accountant you could save 100s of thousands of dollars. 

[Benjamin Weinhart]

Hi Luis, you have a very interesting problem. We can give suggestions here, but you're at the point where it is 1,000% worth it to schedule a planning meeting with a professional. They may only charge a few hundred or few thousand depending on how involved it is whereas you could save multiple orders of magnitude of what they charge in savings/deferrals. They'd be able to give a lot more personalized advice versus what you might find on public forums such as these.

That being said, there's a variety of strategies you might be able to employ. It kind of depends on what your goals are, but you may be able to start consolidating your properties a little more with like-kind exchanges and/or purchasing larger properties where you could do cost-segregations on. Assuming you don't want to create additional management work for yourself, it's possible that higher value properties may give you the advantage of the higher capital outlay without additional work. The drawback of course is that you may be looking at smaller returns %-wise. Depends of course on how the deals work out.

[Basit Siddiqi]

Are you an employee being paid a salary to manage the 150 units?(You mention "I work for a single owner")
Or do you have ownership in the 150 units?

If you are being paid a salary, there is not much that you can do to offset your income.
If you are the owner and managing your own units, then there is plenty that you can do.

[Luis Arguello]

Quote from @Basit Siddiqi:

Are you an employee being paid a salary to manage the 150 units?(You mention "I work for a single owner")
Or do you have ownership in the 150 units?

If you are being paid a salary, there is not much that you can do to offset your income.
If you are the owner and managing your own units, then there is plenty that you can do.

 I am asking for strategies that the owner of the properties can use to save on taxes.

[Kory Reynolds]

It Depends.

Potentially capital investments in the properties could have accelerated depreciation benefits (carpet, LVT, trim, appliances), while also allowing you to drive higher rents, thus saving on some taxes in the short run while driving increased values.  Similar green energy investments could be considered if you can make the numbers work (credits on some types of low income housing can be north of 50%).

Depending on how long these properties have been held, they could consider implementing cost segregation studies via a change in accounting method to accelerate some depreciation.

The operating proceeds could be re-deployed into new properties where cost segregation is an option to accelerate depreciation to offset proceeds.

If the properties are low basis and we are not maximizing the 199A deduction, maybe considering an S-Corp structure for management to be able to participate in retirement plans and also generate wages to use as a 199A base.  This would take some significant thinking - and maybe wait to see if 199A will actually be around past the end of 2025.

All of these (except the 199A) are tax deferral strategies - it is accelerating deductions now for tax savings now, for less deductions and more taxes later.

[Sean O'Keefe]

Quote from @Kory Reynolds:

It Depends.

Potentially capital investments in the properties could have accelerated depreciation benefits (carpet, LVT, trim, appliances), while also allowing you to drive higher rents, thus saving on some taxes in the short run while driving increased values.  Similar green energy investments could be considered if you can make the numbers work (credits on some types of low income housing can be north of 50%).

Depending on how long these properties have been held, they could consider implementing cost segregation studies via a change in accounting method to accelerate some depreciation.

The operating proceeds could be re-deployed into new properties where cost segregation is an option to accelerate depreciation to offset proceeds.

If the properties are low basis and we are not maximizing the 199A deduction, maybe considering an S-Corp structure for management to be able to participate in retirement plans and also generate wages to use as a 199A base.  This would take some significant thinking - and maybe wait to see if 199A will actually be around past the end of 2025.

All of these (except the 199A) are tax deferral strategies - it is accelerating deductions now for tax savings now, for less deductions and more taxes later.

[Zachary Jensen]

Quote from @Kory Reynolds:

It Depends.

Potentially capital investments in the properties could have accelerated depreciation benefits (carpet, LVT, trim, appliances), while also allowing you to drive higher rents, thus saving on some taxes in the short run while driving increased values.  Similar green energy investments could be considered if you can make the numbers work (credits on some types of low income housing can be north of 50%).

Depending on how long these properties have been held, they could consider implementing cost segregation studies via a change in accounting method to accelerate some depreciation.

The operating proceeds could be re-deployed into new properties where cost segregation is an option to accelerate depreciation to offset proceeds.

If the properties are low basis and we are not maximizing the 199A deduction, maybe considering an S-Corp structure for management to be able to participate in retirement plans and also generate wages to use as a 199A base.  This would take some significant thinking - and maybe wait to see if 199A will actually be around past the end of 2025.

All of these (except the 199A) are tax deferral strategies - it is accelerating deductions now for tax savings now, for less deductions and more taxes later.

 Great ideas here! 

[Malik Javed]

Quote from @Benjamin Weinhart:

Hi Luis, you have a very interesting problem. We can give suggestions here, but you're at the point where it is 1,000% worth it to schedule a planning meeting with a professional. They may only charge a few hundred or few thousand depending on how involved it is whereas you could save multiple orders of magnitude of what they charge in savings/deferrals. They'd be able to give a lot more personalized advice versus what you might find on public forums such as these.

That being said, there's a variety of strategies you might be able to employ. It kind of depends on what your goals are, but you may be able to start consolidating your properties a little more with like-kind exchanges and/or purchasing larger properties where you could do cost-segregations on. Assuming you don't want to create additional management work for yourself, it's possible that higher value properties may give you the advantage of the higher capital outlay without additional work. The drawback of course is that you may be looking at smaller returns %-wise. Depends of course on how the deals work out.

Adding to Benjamin's suggestion, by utilizing cost segregation studies, you can take advantage of the accelerated depreciation for shorter life assets in lieu of depreciating the entire property over 27.5-years. This applies to current year tax deductions, and you can also employ a “look back” cost seg study where you can retroactively reclaim any missed deductions from previous tax years.

By filing a form 3115 and calculating the proper 481(a) adjustment, you can recapture and correct any erroneous depreciation in prior years and claim the difference in the current tax year as a lump sum. This methodology is advantageous for taxpayers since this does not involve filing amended tax returns.

Other things to consider bonus depreciation, Qualified Improvement Property (QIP), and 179. Please also remember that not all states conform to federal law. Please consult with your CPA and/or tax attorney for appropriate tax planning. Feel free to reach out if you want more insights.

[Robert Ellis]

Quote from @Luis Arguello:

I manage 150 units across 30 properties in Miami. I work for a single owner. We are projecting to pay taxes on $1,500,000 for this year and $2,400,000 next year. That about $500,000 in taxes this year and $800,000 next year. I wanted to get the opinion of others on what the best strategy is to deploy capital back into the properties to in order to reduce our taxable income while also continuing to build wealth. Any input would be greatly appreciated.

 there's a lot of ways like petitioning, confidential sale price, buying other assets to offset and depreciating them in year one, etc. but the main way I would do it is to invest in ground up developments with tax abatements which pushes even higher cash flow and then to keep them as retained earnings or in a non taxable structure depending on your equity position. I know a few wealth advisors if you want to chat further. 

[Julio Gonzalez]

@Luis Arguello Have you considered cost segregation studies on your properties? You could accelerate the depreciation which would reduce your current taxable income. Happy to chat further. Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions! 

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq