Real estate investing as a tax strategy

Assuming you are buying a membership interest in a LLC or other entity interest which the entity owns the Property, you won’t be able to individually do a 1031 exchange because it’s not like kind property. The entity itself (composed of all the members) would have to do the 1031 exchange.

I can’t answer the depreciation question specifically but that doesn’t seem correct unless the entity held the property for a long time.

I know 1031s are popular but all you are doing is pushing the tax liability down the road. At some point, you will owe those taxes and I don’t see the tax rates ever going down. 1031s are very useful to some people but the rest will spend more in attorney fees doing the 1031s than they will save in taxes over their lifetime.

No doubt they are doing cost segregation studies which does front load depreciation.

But depreciation lowers your basis, and accelerated forms of depreciation also get recaptured. So a good chunk of the losses you take today may end up becoming ordinary income when sold. And other losses you take today will be capital gain income when sold (which is still a good deal... I'll take a dollar of ordinary deduction today in exchange for $1 of cap gain income in the future, all day, any day, but it is a cost).

Also, since you are an investor here, you need to look into passive activity rules as they relate to real estate. Depending on your income, those losses may get "suspended" and not available to be taken in current years. The losses are "suspended" until you are able to take them or until you have a taxable disposition. Noe that a 1031 exchange is not a taxable disposition.

Also since the LLC owns the property, it's the LLC that must do the 1031 exchange... so even if it does... you are stuck with this LLC. If you sell out then you will get hit with all that gain.

Where people "win" with real estate as a tax strategy is to be able to take the losses over time (either offsetting other passive income or because your modified AGI is low enough to take losses, or because you qualify as a real estate professional), and then you die before selling, getting stepped up basis which blows up the recapture issues.

the best way to win is to get qualified as a real estate professional.

Here at the beach where there are a lot of 1031s, the attorney fee is under $1K.

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1031s are popular but all you are doing is pushing the tax liability down the road. At some point, you will owe those taxes

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Wrong. You hold to death and your kids get a step up in basis to FMV.

Right now, bonus depreciation combined with material participation is pure gold. A few partners and I closed on five properties on 12/30 for the sole purpose of offsetting our 2021 income through the depreciation; the cash flow and equity we’ll gain we purely view as an added bonus.

Definitely thoroughly consult with your CPA, but from personal experience it is an amazing tool to utilize.

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I found this great site on what it takes to qualify as a real estate professional to take 100% of tax deductions. Pretty easy. Looks like basically you just have to document 3 hours a day 5 days a week (750 hours). Looks like my wife’s new employment this year will be checking on our two rentals and getting on Zillow a few hours a day (on paper).

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It's easy to do you if are in real estate anyways (such as a realtor) and it's easy to do if you don't have another job (such as your wife).

Where the IRS looks is for people who have a full time job / company because in addition to 750 hours the real estate activity must be the majority of total hours worked.

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If any of you are doing this, do I need a separate LLC to maximize deductions as an S corp and should this only be my wife?

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This is a two part issue.

1) If you qualify as a real estate professional and you have net income... the net income is subject to S/E tax. An S corp would help with this. But you can have an LLC, taxed on your 1040 (no S election) and still take all the same deductions.

2) Property held in an S corp does not get a step up in basis at death. And if you need to get the property out of the S corp at some point, it's at taxable event.

Never, every put property in an S corp. Put it in an LLC, taxed as a disregarded entity.

Cost seg very much needs to be in play

Myself and two other poster split a share in a syndicated multi family complex. Covid happened so take what I say with a grain of salt. We’re supposed to be getting our first dividend in Q1 ‘22 when we’ve been expecting them since Q1 ‘20. Apparently we’re under contact to sell. I’ll give an update with our outcome if it closes in March/April timeframe.

We ran a loss through spring this year. Solid 2 years at a loss.