Starting out- tax benefits

[Nick Walley]

Hey BP! 
First post and it’s great to meet you all. 

I would love some advice / perspective… I live in the East Bay Area here in CA, have a great W2 and good sales commissions, and want to start RE investing. I’ve been learning for the last few years from the podcast and I know I need to get started and get some experience. 

Given that I have the makings of a good team here (my dads a contractor, I have a good RE agent, and my wife will self-manage) I want to get into single family or under 4 unit BRRRR deals here locally to get experience before I go out of state. I can qualify for an investment house at 25% down, up to 600k purchase price and can come up with the down payment. The cash on cash return would be about 3%. Is this a waste of capital?

My wife and I own our home and would consider moving into a multi family house hack, but that wouldn’t be for another 1.5 years. 

Also- is there a strategy that can reduce my taxes? I am in CA and pay quite a bit on my earned income. Thanks!!!

-Nick

[Joe Splitrock]

@Nick Walley options for reducing taxes could be limited in your situation. It is very common for real restate to generate tax losses after including depreciation and interest deductions. That means your rental income is likely not taxable. In certain circumstances, if you actively participated in passive rental business, you may be able to deduct up to $25,000 in losses against your W2 income. This isn't possible if your married household income is over $150,000 and it starts phasing out at $100,000. That is likely not an option if you are a high wage earner.

You can argue that shielding rental income from taxes alone is a decent tax benefit. There may also be other tax deduction benefits, such as expensing car mileage or a portion of your cell phone. Generally these benefits are small when starting out, because your business needs to justify the expense. For example owning one rental property is not significant enough to justify writing off an entire car expense for just one property.