Tax strategies for high income W2 earner

[Tuan Hoang]

Hey everyone,

I am a high income W2 health care provider. Taxes were never the main reason I wanted to get into real estate, however I took a 30min coaching call during the lockdown to discuss strategies and the person I discussed with recommended I look at my investing from a different perspective. This coach recommended that I not concern myself as much with cashflow, but instead invest in more expensive properties and use depreciation/write offs to offset my W2 income. I quickly found out that it is a terrible strategy (not concern yourself with cashflow) and now just recently found out it isn't even possible to use passive losses against my active income and was quite disappointed. 

I was wondering if investing in actual properties would help me from a tax standpoint other than provide potentially tax free rental income? (I cannot qualify for REPS under my current circumstances) I know this is more of a personal decision/preference and I know that there other advantages to investing in real estate, however if tax free supplemental income is the main benefit, I may instead look to focus more on syndications and not take on the headaches and massive time requirement of owning rental properties.

[Christopher Smith]

My benefits from RE investing have been:

1) Depreciation that offsets my annual rental cash flow so only about half of my cash flow is taxable, the other half not. 

2) Underlying appreciation of my properties that is not taxed currently at all. (Probably 75% of my property value is in California where the properties have all increased between 2 and 3 times, so this number is very significant. My other properties out of state have appreciated nicely as well, but not like California, the out of state properties have been stronger on the cash flow side, a nice mix of cash flow and appreciation)

3) If I hold my properties until death as I plan to do all the "tax consequences" of all my deprecation benefits AND all my appreciation benefits are totally eliminated under current law when tax basis steps to FMV. So huge economic benefit over time with potentially no tax hit ever.

Over time all of this amounts to a huge tax benefit (say when compared to salary), while at the same time the cash flow keeps current money flowing into the bank to fund other investments that I have (so annual cash flow is important, not to mention the fact that cash flow keeps your initial buy decision a sound honest economic one, and not based solely on pie in the sky "future" benefits tax or non-tax).

My goal when I started was to generate about 2/3 of my income through underlying appreciation, and 1/3 through annual cash flow. Appreciation has been totally massive so I'm well over 2/3, but that's a really nice problem to have especially from a tax perspective. The ample cash flow kicked off has been feeding my investment primarily in FAAAMG stocks which have also generated massive appreciation, again none of which is currently taxed, and will probably never be taxed.

BTW: I do almost nothing in terms of time spent of my properties as I have competent managers in all states where I have rentals. You must select them carefully because there are some bad ones. However, if you get good reasonably priced management its a very easy business to run. I've never spoken one word personally to one single tenant in 20+ years, and I never intend to speak to one, all of that has been handled by my managers. Manage your managers, not your properties.   

FAAMG = Facebook, Apple, Amazon, Alibaba, Microsoft and Google (and a couple of REITs thrown in for good measure, like MPW, STOR)