Tax Savings as a High-Earning Dual Income W2 Family ($300k / yr)

[Account Closed]

“Wealthy people buy real estate.” I realize I’m fortunate enough to count myself among them. These supposed tax savings though… where are they?

My wife and I are fortunate enough to have two W2 jobs making ~$150k / yr each. I only mention this number because at $150k AGI, the active investor allowance enabling one to deduct $25k in losses from active income disappears, as I understand it.

My current portfolio:

Condo (purchased in 2021 w/ 5% down)

Single Family (purchased in 2022 w/ 5% down)

Multi-family primary residence (purchased in 2023 w/ 15% down)

• Above-garage apartment and detached ADU are rented out. As well as guest room in the main house.

These properties are all personally owned and obviously highly leveraged. They basically operate at break-even. I’m fine with this, for now, as a long-term investor.

I don’t believe our current situation would enable us to qualify as Real Estate Professionals, which would result in massive deductions. Is everyone praising the tax savings of real estate qualifying for this status?

I love the leverage one can achieve with real estate, and I still love the asset class. Maybe I simply expected too much. If the answer here is simply, “You leveraged up too much and too quickly.” I can accept that. I do feel foolish for not understanding that all the deductions that real estate has to offer, could only be used against real estate income.

[Dan H.]

Other (besides standard depreciation) off the top of head tax advantages of RE:

- cash out refi gives tax deferred access to equity

- 1031 for investment properties allow deferring of the gains.   

- 2 of 5 year rule on owner occupied allows gains (to a limit) being exempt from gains tax

- accelerated depreciation (cost segregation) can further allow writing off the depreciation

- this to me is the most crazy of all, at death property value is rebaseline with all gains being forgiven to the heirs.  This combined with 1031 means I can sell and never pay the gains deferred in the 1031.

- you or your spouse can qualify as RE professional and the limits the OP discussed do not apply

- you can use the "STR loophole" (terrible name) to not have the limits the OP Discussed apply

- a derivative of the STR loophole that for lack of better name I will call the MTR loophole will let you provide amenities to not have the limit the OP discussed apply.

I suspect there are many more.  @amanda Han

I never expect to pay taxes under the current rules for the gains on my investment property. I actively reduce my income from my RE investments (others seek cash flow, I increase leverage to create cash and reduce cash flow with mindset that leverage will maximize ROI). In 2024, I cost segmented 2 high value properties and expect to pay very little in taxes. I pay the taxes I am required to pay (mostly without complaint) but happily strive to reduce the taxes that I am required to pay.

Consult your tax professional.  Look up BP blog posts from Amanda Han AND/or Matt macFarland.  

Good luck