In the last 4 years, I've paid ~$80K of federal tax on ~$1,000,000 of W2 income.
That’s an 8% tax rate.
The secret?
Qualifying my spouse as a Real Estate Professional.
A thread 👇🏻
That’s an 8% tax rate.
The secret?
Qualifying my spouse as a Real Estate Professional.
A thread 👇🏻
As most know, W2 income is considered ordinary income for tax purposes.
Ordinary income is taxed on a progressive schedule.
Meaning the more you earn, the more you pay.
On $1 million of W2 income, I could have paid ~$300K of federal tax.
But I didn’t.
Ordinary income is taxed on a progressive schedule.
Meaning the more you earn, the more you pay.
On $1 million of W2 income, I could have paid ~$300K of federal tax.
But I didn’t.
Instead:
- I purchased rental real estate
- Ran a cost segregation study
- Accelerated the depreciation
- Qualified my spouse as a real estate professional
- Converted passive losses into active losses that offset my W2 income
Let’s unpack each step:
- I purchased rental real estate
- Ran a cost segregation study
- Accelerated the depreciation
- Qualified my spouse as a real estate professional
- Converted passive losses into active losses that offset my W2 income
Let’s unpack each step:
Step 1: Purchase investment property
The easiest step in the process. Do not get stuck here, you’ll be saving thousands of dollars in tax. Just make sure the rental income can cover your mortgage.
If you already have an investment property that you rent out, even better.
The easiest step in the process. Do not get stuck here, you’ll be saving thousands of dollars in tax. Just make sure the rental income can cover your mortgage.
If you already have an investment property that you rent out, even better.
Step 2: Run a cost segregation study
For residential properties, the standard depreciation period is 27.5 years.
However, a cost segregation report allows you to shorten that period to 5 or 15 years for certain components of the building.
For residential properties, the standard depreciation period is 27.5 years.
However, a cost segregation report allows you to shorten that period to 5 or 15 years for certain components of the building.
Let’s take carpet as an example.
In a cost segregation study, an engineer will appraise the specific value of your carpet and allocate it to 5 year property.
Now you are able to depreciate the carpet’s value over 5 years, rather than 27.5 years.
Why is that important?
In a cost segregation study, an engineer will appraise the specific value of your carpet and allocate it to 5 year property.
Now you are able to depreciate the carpet’s value over 5 years, rather than 27.5 years.
Why is that important?
Step 3: Accelerate the depreciation via “Bonus Depreciation”
Thanks to the TCJA, you’re allowed to depreciate 100% of that 5 and 15 year property in the taxable year your property is placed into service.
Now you can depreciate 100% of your carpet's value in the first year 🤯
Thanks to the TCJA, you’re allowed to depreciate 100% of that 5 and 15 year property in the taxable year your property is placed into service.
Now you can depreciate 100% of your carpet's value in the first year 🤯
Step 4: Qualify for Real Estate Professional Status “REPS”
There are two simple tests you must meet in order to qualify as a Real Estate Professional:
1. You spend more than 750 hours in real estate, AND
2. You spend more than half of your time in real estate
There are two simple tests you must meet in order to qualify as a Real Estate Professional:
1. You spend more than 750 hours in real estate, AND
2. You spend more than half of your time in real estate
Because of condition #2, it’s impossible to have a full-time job and qualify.
That’s where my spouse comes in.
She stays at home with the kids and can spend 15 hours per week actively managing our investment properties.
She individually qualifies for REPS.
That’s where my spouse comes in.
She stays at home with the kids and can spend 15 hours per week actively managing our investment properties.
She individually qualifies for REPS.
What hours count toward the 750 minimum?
- Executing Leases
- Cleaning / Repairs
- Monthly Bookkeeping
- Communicating With Tenants
Pretty much anything that a property manager would do.
- Executing Leases
- Cleaning / Repairs
- Monthly Bookkeeping
- Communicating With Tenants
Pretty much anything that a property manager would do.
What hours do not count toward that 750 minimum?
- Time spent searching Zillow
- Educational hours
- Travel time to and from the property (usually)
Pretty much anything a typical investor would do.
Now for the last step in the process:
- Time spent searching Zillow
- Educational hours
- Travel time to and from the property (usually)
Pretty much anything a typical investor would do.
Now for the last step in the process:
Step 5: Convert passive losses into active losses that offset my W2 income.
Generally, high earners cannot use passive losses to offset active income.
However, that rule does not apply for Real Estate Professionals.
Generally, high earners cannot use passive losses to offset active income.
However, that rule does not apply for Real Estate Professionals.
Thanks to my wife qualifying for REPS, we are able to use passive losses from our investment properties to offset active income from my W2 day job.
The Result?
The Result?
Each year we’d purchase ~$600K of real estate and generate ~$150K of paper losses thanks to Bonus Depreciation.
We’d then use that $150K of paper loss to offset a majority of my $250K W2 income.
Made for a pretty sweet tax refund each spring.
We’d then use that $150K of paper loss to offset a majority of my $250K W2 income.
Made for a pretty sweet tax refund each spring.
We then applied this strategy diligently for many years.
And the best part?
When I go to sell each property I’ll use a 1031 exchange to defer taxes.
I’ll do this over and over and over until I die, at which point my basis resets.
The beauty of understanding the tax code 🙂
And the best part?
When I go to sell each property I’ll use a 1031 exchange to defer taxes.
I’ll do this over and over and over until I die, at which point my basis resets.
The beauty of understanding the tax code 🙂
I’m just scratching the surface with this strategy.
If this piqued your interest, I go into a ton more detail on my site (link in bio).
I’m on a mission to help others achieve financial independence much sooner than they would otherwise.
If this piqued your interest, I go into a ton more detail on my site (link in bio).
I’m on a mission to help others achieve financial independence much sooner than they would otherwise.
PS. I'm new to Twitter. If you enjoyed this thread I'd really appreciate if you would:
1. Follow me @itsDanny_V … I post 2 threads just like this each week
2. Share or RT the first tweet to share this thread with your audience
Thank you 🙏🏻
1. Follow me @itsDanny_V … I post 2 threads just like this each week
2. Share or RT the first tweet to share this thread with your audience
Thank you 🙏🏻
If you like Threads like this, you might enjoy my free weekly newsletter.
1 tip each week to unlock financial independence.
First article launching next Saturday 🙏🚀
Join here:
wealth2.com
1 tip each week to unlock financial independence.
First article launching next Saturday 🙏🚀
Join here:
wealth2.com
Loading suggestions...