Tax strategies for high income W2 earner

Tuan Hoang · 2020-08-08T14:24:06-07:00

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.

Carl FischerPro Member

Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes

6y

@Tuan Hoang

Listen to other HIEs and their professional advisors. There are a lot of strategies to help your tax situation and a lot of hacks trying to get your money. There is no rush so vet any ideas and perform your due diligence on each suggestion.

One of the strategies I use is to reduce or eliminate taxes- by using Roth IRAs and 401ks and other qualified plans to invest in real estate and other alternative assets. In addition, none of my strategies is to try to lose money or limit cash flow to save on taxes as some “financial advisors” recommend. Time constraints, income, tax bracket, exit strategy, age, timeframe, etc all should be considered when developing a plan. There are more strategies but too much to describe in a post without understanding your personal situation and goals.
We can talk if you want.

[email protected]215-283-2868

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Christopher Smith

Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes

6y

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)

2 Reply

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

6y

@Tuan Hoang

I find trying to bring passive losses onto your 1040 to be something of an "advanced" game. That being said, you can't do it anyway since you are a W2 employee, i.e. you already have a high income. The $25k allowed deductions is phased out at $150k modified AGI. You shoudn't be able to qualify as a Real Estate Professional (for IRS purposes). So, on the surface you can't get those passive losses onto your 1040 every year.

That's the short of it from a non-professional but was in the same situation as you. Good luck.

1 Reply

Christopher Smith

Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes

6y

Originally posted by @David M.:

@Tuan Hoang

I find trying to bring passive losses onto your 1040 to be something of an "advanced" game. That being said, you can't do it anyway since you are a W2 employee, i.e. you already have a high income. The $25k allowed deductions is phased out at $150k modified AGI. You shoudn't be able to qualify as a Real Estate Professional (for IRS purposes). So, on the surface you can't get those passive losses onto your 1040 every year.

That's the short of it from a non-professional but was in the same situation as you. Good luck.

I have no properties that generate losses, only gains (and that's after depreciation). That's the whole point of doing serious upfront due diligence based on fundamental economics and not tax gimmickery.

People who routinely buy loser properties at grossly inflated prices believe in that wonderful old maxim of:

"I lose on each property, but I make up for it on volume".

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Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

6y

1) Bonus deprecation from cost segs from syndication deals (need to be real estate professional with 750 active hours)

2) land conservation easements

3) oil and gas deals

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Jerel Ehlert

Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes

6y

The classic answer: It depends.

Depends on where you are (state income tax?) and where you invest. Depends on what type of RE you invest in, too.

One overall strategy is to take as much of your W-2 and plow it into real estate until your RE > W-2.

Syndication can take some of the time investment out of the equation. But you have others controlling your deal.

You can put capital into a small commercial building with a few commercial tenants, and have a realtor manage that. A small office, retail strip center, or stand-alone space (restaurant, convenient store, doctor/dentist office). These tenants tend to self-manage, pay regularly, and stay forever. Biggest concerns are major economic downturns (like now), that should be relatively rare. (YMMV) Putting 40% down will give you a good rate under most circumstances, and you can offset the cashflow against depreciation. To take other advantages in the tax code requires proof of "significant activity" in the RE industry, but check your tax person for this.

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Tax strategies for high income W2 earner

Tax strategies for high income W2 earner

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