Tax Strategy for Buy and Hold?

Question

Hi BiggerPockets community!

I’m looking for some tax-saving strategies related to my buy-and-hold approach. My game plan is to purchase properties that generate positive cash flow from day one. For each deal, I put down the required 25% for rentals. For example, property #1 cash flows about $300/month, property #2 about $400/month, and so on.

I’m a new realtor currently accumulating hours for real estate professional status, and besides taking advantage of accelerated depreciation, I’m wondering what other strategies I can use to reduce my tax liability when all my properties are positive cash flow from the start.

Specifically, should I be using that cash flow to make additional mortgage payments, or would that be less tax-efficient? Also, how might this strategy interact with capital gains from frequent stock trades (I’m in the 37% bracket)?

For some context, I have enough other income to cover multiple down payments, so I’m not reliant on the rental income for my personal cash flow.

Any insights or advice would be greatly appreciated!

James Mc Ree · Answer

Here are two suggestions:

Focus more on appreciation by buying in the best markets and improving your property. Appreciation is where most of your profit will come from and it is tax deferred until you sell. You have the added benefit of being able to refi with no unfavorable tax impact the appreciated value to do more. Cash flow is good, but you pay tax annually on it.

Shop for properties in opportunity zones. Capital gains taxes are eliminated if you hold the property 10+ years. Also, look in areas with tax abatements which reduce your taxes for the next several years. You may think this suggestion runs counter to the first one since opportunity and abatement zones are usually not good areas (and you might be right!). The idea is they will become good areas in time, but that timeframe is undefined, so you have to do your homework.