Posted by
Message
Wallace Ritchie
Iowa State Fan
Des Moines, Iowa
Member since Oct 2021
299 posts
 Online 

Real estate investing as a tax strategy

I’m talking to a guy who buys apartment complexes with investors. They basically “add value” to complexes that are run down and then sell the complex. Minimum investment is $65k. You get a quarterly payment from rental income and then 16-22% when they sell. Most people 1031 this into a new deal to avoid capital gains. He says the main value though is depreciation on the K-1. For $100k I could expect $70k in depreciation which would save me about $30k in taxes.

Has anyone done anything like this? It sounds good but am I missing anything important? Guy has a good track record and no complaints I could find. Was recommended by someone I trust as business savy.


jrhoad1
LSU Fan
Baton Rouge
Member since Oct 2009
29 posts

re: 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.


TigerMan327
LSU Fan
Elsewhere
Member since Feb 2011
4069 posts

re: Real estate investing as a tax strategy
Google “tax advantages of real estate syndication”

Idk bout the 1031 part but you definitely can get a K-1 which willl depreciate any salary you make from yearly rental income of that complex. Not sure if it can be pushed over to your normal Jobs income as well.

From what I’ve read syndications can be easy money but you need to vet the guy in charge of running the show. Make sure he knows how to pick these complex’s or storage units or whatever and had a good track record. It’s not all that rare to lose all your money in these situations if your guy doesn’t know what he’s doing
This post was edited on 1/14 at 6:50 am


LSU1018
LSU Fan
Baton Rouge
Member since Feb 2007
7055 posts

re: Real estate investing as a tax strategy
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.


Wallace Ritchie
Iowa State Fan
Des Moines, Iowa
Member since Oct 2021
299 posts
 Online 

re: Real estate investing as a tax strategy
Thanks for all the thoughtful responses. It looks like you can accelerate depreciation on rentals like apartments (link) and I’ve read about short term depreciation over 5 years you are allowed if the group does a depreciation analysis for specific parts of structure. I’ll ask if that’s what these guys are doing. Thanks for the good points.

LINK

Also, my wife works part time and he said if we represent her as working in real estate in any way it would increase the deduction. I think this is what TigerMan is getting at. I think we can easily do this as we have two rental properties.
This post was edited on 1/14 at 7:44 am


LSUFanHouston
LSU Fan
NOLA
Member since Jul 2009
27898 posts

re: Real estate investing as a tax strategy
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.


Wallace Ritchie
Iowa State Fan
Des Moines, Iowa
Member since Oct 2021
299 posts
 Online 

re: Real estate investing as a tax strategy
Excellent post. Thanks for the information.


Replies (0)
Replies (0)
00
SalE
LSU Fan
At the beach
Member since Jan 2020
1009 posts

re: Real estate investing as a tax strategy
Here at the beach where there are a lot of 1031s, the attorney fee is under $1K.


Replies (0)
Replies (0)
00
TD SponsorTD Fan
USA
Member since 2001
Thank you for supporting our sponsors
Advertisement
tigeralum06
LSU Fan
Member since Oct 2007
2334 posts
 Online 

re: Real estate investing as a tax strategy
quote:

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


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


Replies (0)
Replies (0)
50
Wallace Ritchie
Iowa State Fan
Des Moines, Iowa
Member since Oct 2021
299 posts
 Online 

re: Real estate investing as a tax strategy
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).

LINK

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? I make $300-350k a year (60% is 1099) and my wife is making $20-30k. I already have one LLC for my consulting as a pass through we file S corp. Not sure if I could put the real estate stuff through it as well as it’s a different type of business activity.
This post was edited on 1/15 at 8:51 am


StealthCalais11
LSU Fan
Lurker since 2007
Member since Aug 2011
12164 posts

re: Real estate investing as a tax strategy
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.


Weagle25
Auburn Fan
THE Football State.
Member since Oct 2011
41967 posts

re: Real estate investing as a tax strategy
quote:

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).


I would talk to somebody about this. As I don’t think you’re reading as carefully as you need to and this is potentially a huge issue if you ever get audited. I would use the site you linked as a general guide to help you understand it but you need to dig deeper in more credible sources.

IRS will be pretty aggressive challenging you in this area.

And by talk to somebody, I mean a CPA. Not this board.
This post was edited on 1/15 at 12:37 pm


Replies (0)
Replies (0)
00
LSUFanHouston
LSU Fan
NOLA
Member since Jul 2009
27898 posts

re: Real estate investing as a tax strategy
quote:

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).


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.

quote:

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?


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.


LSUFanHouston
LSU Fan
NOLA
Member since Jul 2009
27898 posts

re: Real estate investing as a tax strategy
quote:

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;


I hope you are doing a cost seg? Because otherwise the property won't get any bonus and buying it at the end of the year will give you basically 0 depreciation in 2021.


StealthCalais11
LSU Fan
Lurker since 2007
Member since Aug 2011
12164 posts

re: Real estate investing as a tax strategy
Cost seg very much needs to be in play
This post was edited on 1/15 at 2:00 pm


Replies (0)
Replies (0)
00
bobdylan
LSU Fan
Cankton
Member since Aug 2018
1177 posts

re: Real estate investing as a tax strategy
quote:

1) If you qualify as a real estate professional and you have net income... the net income is subject to S/E tax.


My understanding, if it’s a rental activity for a real estate prof, it’s still not subject to SE.


Replies (0)
Replies (0)
00
Larry Gooseman
USA Fan
Houston
Member since Mar 2014
2531 posts

re: Real estate investing as a tax strategy
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.


Replies (0)
Replies (0)
10
first pageprev pagePage 1 of 1next pagelast page
refresh

Back to top

logoFollow TigerDroppings for LSU Football News
Follow us on Twitter, Facebook and Instagram to get the latest updates on LSU Football and Recruiting.

FacebookTwitterInstagram