All Forum Posts by: Lane Kawaoka

For individual taxpayers selling their principal residence, the IRS does provide an exemption up to $250,000 of the capital gains for single filers and up to $500,000 for married couples filing jointly. This exemption is applicable if you've lived in the home for at least two of the five years immediately preceding the sale.

For investment properties, a Section 1031 exchange, often called a "like-kind" exchange, allows the deferral of capital gains taxes if the proceeds from the sale are reinvested in a similar property. This process is quite specific and must be adhered to with strict guidelines, including timelines and the nature of the property being purchased.

Another method is the lazy 1031 exchange which is banking passive losses on your 8582 FORM from depreciation on other parts of your grouped portfolio such as several other real estate syndications.

Be careful to get good insurance costs. We saw our insurance 3X a few years ago which is why we sold our apartments in this area.

When selling your primary residence, you're eligible for a significant tax advantage: individuals can exclude up to $250,000 of capital gains from their income, and married couples filing jointly can exclude up to $500,000. This exemption can substantially reduce or even eliminate your capital gains tax obligation, depending on the profit you realize from the sale. It's a key strategy for homeowners to consider when planning their sale and assessing their potential tax implications. For rentals its a different story.

Probably need a new cpa. Sounds like they are having a wrong interpretation of active/passive. Sign of a non in the trenches CPA.

Selling a house in a trust, whether revocable or irrevocable, does involve potential capital gains tax considerations, just like any other real estate transaction. The key detail here is how the trust is structured and the specific circumstances surrounding the sale.

In many cases, the type of trust (revocable vs. irrevocable) can influence the tax implications. With an irrevocable trust, for instance, the property is considered outside of the personal estate of the grantor, which can lead to different tax treatments compared to a revocable trust where the grantor maintains control over the assets.

When it comes to capital gains tax, it's not just about whether the property is in a trust but also about how long the property was held, the basis at the time of transfer into the trust, and the selling price. The trust's tax status and provisions can significantly impact the calculation of capital gains tax.

Moreover, there are various exemptions and strategies that can potentially reduce or eliminate capital gains tax, such as the primary residence exclusion for individual sellers, which isn't automatically applicable to trusts but may still benefit the beneficiaries under certain conditions.

For those inheriting property, the scenario shifts. Typically, inherited property benefits from a "step-up" in basis to the market value at the time of the original owner's death. This can significantly reduce the capital gains tax if the property is sold shortly after being inherited, as the "gain" may be minimal.

This step-up in basis is a crucial aspect of estate planning and can prevent substantial tax burdens for heirs. However, if the property has appreciated significantly over time, and depending on the estate's overall value, other tax considerations, like estate taxes, may come into play, especially in high-value estates.

I used to buy turnkey rentals in Birmingham, Atlanta, Indianapolis, when I first started. Great way to by first few rentals especially if in high price CA.

From the real estate you are going to be getting Passive Activity Losses (PALs) which is depreciation to offset passive income, potentially reducing your overall tax liability. This strategy, if combo with REPS (real estate profession status) basically checkbox on your taxes is key to canceling out full-time W2 employment.

If this is new to you... PALs fundamentally work by allowing investors to deduct depreciation from their properties, which can significantly reduce the taxable income generated by these investments. Depreciation is a tax deduction that reflects the costs of wear and tear, deterioration, or obsolescence of the property. For example, my first property in Seattle was a $350,000 property, separating the land value ($150,000) from the improvement value ($200,000) enables an annual depreciation deduction around $6,000 over 27.5 years. This deduction can offset the income generated by the property, potentially reducing it to a tax-neutral position.

For those with full-time jobs, the challenge lies in the IRS designation of "real estate professional," which has specific hour requirements that must be met to take full advantage of these deductions against ordinary income. If you can't qualify as a real estate professional, your ability to use PALs to offset non-passive income (like your W2 earnings) might be limited. However, the real estate investments still offer the potential for tax-deferred growth and, under certain conditions, the ability to carry forward unused passive losses to offset future passive income.

The concept of depreciation and bonus depreciation is particularly advantageous in the early years of an investment, allowing for significant upfront deductions. Bonus depreciation can accelerate deductions, increasing the amount of passive losses available to offset passive income from real estate or other sources. It's important to consult with a tax professional who can advise on how these strategies align with your overall financial situation, especially considering your full-time employment and income structure.

Moreover, as your portfolio grows, and particularly if one spouse can transition away from W2 employment, the landscape of your income and tax liabilities shifts. The progression towards more passive income sources, balanced against the backdrop of your evolving investment strategy, can lead to a more favorable tax position. This journey, is the transition from primarily active (ordinary) income to a portfolio characterized by passive income streams, benefitting from tax-efficient strategies like PALs.

@Chandler Williams

Investing $10,000 into real estate is not really practical… sorry, but I've been there, back in 2009, when I was just starting, I didn't have a massive pile of cash. Instead, I looked for opportunities where the barrier to entry was lower. That's how I stumbled upon turnkey rentals. These properties were a gem because they were already rehabbed, often with a tenant ready to go. Places like Atlanta, Birmingham, and Indianapolis were my hunting grounds, where you could find properties for around a hundred thousand dollars.

Here's the catch though: in those lower price markets, you still need a 20% down payment. Typically, you're looking at needing $20,000 to $30,000 at least for the down payment, plus some extra for cash reserves. It's a harsh reality of real estate investing; it grows steadily and offers good leverage, but getting to that first rung on the ladder requires a solid financial foundation.

So, what can you do with $10,000? My recommendation is to start with index funds. It's a more accessible way to grow your initial investment until you can hit that $20,000 to $40,000 liquidity mark, which opens more doors in real estate.

Commercial pm is way better than residential pm. That said they have a lot on their plate and no one will run it as their own. Sad truth. I owned 11 of these turnkeys at one time then sold them in 2017-2019.

@Ashni Modi 

Your journey into real estate investing like mine starting in Seattle now Hawaii, poses not so unique challenges, especially with the high entry prices that can often exceed $1 million or 600k to get out of the bad areas. But if you have a $100,000 downpayment range you could split it up 2-3 ways with a 20-30k downpayment three ways.

In primary markets like Orange County, where achieving a Rent-to-Value Ratio of over 1% becomes challenging, looking out of state is the answer. The Rent-to-Value Ratio, a critical metric where monthly rent divided by purchase price should ideally exceed 1% for sustainable cash flow post-expenses. 

Exploring secondary or tertiary markets can be a strategic move, especially in regions where this ratio is more favorable. Less cool cities within the Midwest offer a blend of cash flow and lower appreciation, several cities are noteworthy:

1. Indianapolis, Indiana
2. Kansas City, Missouri
3. Memphis, Tennessee

In 2012-2015, I bought 11 of these turnkey rentals. After went into syndications.