The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 114 - How Passive Real Estate Investors Save Big on Taxes WITHOUT Real Estate Professional Tax Status
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Learn how real estate investing creates valuable tax losses that can offset income and build long-term wealth, even for passive investors without real estate professional tax status. These tax advantages allow investors to collect cash flow without paying taxes while building suspended losses that can offset future capital gains.
• Depreciation offsets rental revenue, allowing tax-free cash collection
• Passive losses accumulate on Form 8582 for future use against passive income
• Cash-out refinances provide tax-free access to increased property value
• Qualified Opportunity Zones offer tax deferral and potential tax-free growth
• Real estate losses can offset passive income from business interests
• Tax planning should precede real estate investing for maximum benefit
• Advanced tax reduction strategies can provide immediate 100% ROI
• Using tax savings to invest in real estate creates compounding tax advantages
Real estate investing gives you access to losses, and losses can be incredibly valuable. If we can create losses to offset our income, wouldn't that be magnificent? Even if it's cashflow positive, we have losses that we're reporting and it could potentially reduce our taxes. Well, as exciting as that sounds, unless you have real estate professional tax status or you have short-term rentals, you're unlikely to be able to use those losses to offset your ordinary sources of income. And we have lots of real estate syndicators that are our clients and who we talk to, and lots of people investing to these vehicles, whether it's multifamily or single family rentals on their own or giant self-storage units and they're very powerful wealth vehicles. And even if you don't have real estate professional tax status, the tax savings and opportunities here can still be very helpful and can be part of your holistic tax plan. Now pay very close because there are limitations. Now, I mentioned, you're not going to be able to use these losses to offset your ordinary income if you don't work full time in real estate and have that real estate professional tax status, so you're not going to get a refund against your W-2, but hang in there. There are still really great opportunities you are going to learn how to take advantage of these passive investments in the long-term rentals, in the commercial rentals and the syndications. Even if you're not real estate professional you don't have that status You're going to understand the tax benefits associated with this situation and you're going to also be able to determine how does this form of investing fit into your overall wealth building formula. Now, before we go any further, another call to action here, before we get into the content If you find any of this interesting and you want to start thinking about how you can use advanced tax reduction planning to save you money in taxes, go to taxplanningchecklistcom for a free checklist and mini course to help gain you some exposure to some foundational planning ideas and assess what opportunities may be available. Also, if you don't want to waste your time or it's not a waste of time, but if you don't want to take your time reviewing the checklist and accessing the mini course, which has case studies you can also go to prosperlcpacom slash apply Prosper with an L? Cpacom slash apply to see how these strategies may apply to you. You will get an opportunity report where we share with you new ideas you've never heard of before and talk about how that can apply to your situation. How much can you save with our advanced tax reduction strategies? All right, now let's get into this conversation here.
Speaker 1:So these real estate investments overall there are profitability opportunities that you may not find anywhere else. We see a lot of our colleagues and clients that are investing into and building these different vehicles. You can potentially, as we may have said earlier, you can double your investment. Imagine investing $100,000 and turning it into $200,000 in a couple of years. And because these are passive investments, you can use a property manager. You don't have to deal with landlording, dealing with the three T's right the toilets, tenants and the trash. And now you can invest passively into other experts, some of them who I brought on and had conversation with, like Jeremy Beauches and Tim Vest and Tim Vitale. These guys are all rock stars, doing it for their whole lives. You could take part in their opportunities.
Speaker 1:But in addition to the profitability, there are some really awesome tax savings opportunities here. First, let's think about this you have depreciation offsetting the revenue because you get so much depreciation, and that depreciation is going to be even more now that we're back to 100% bonus. So as the revenue comes in and you collect your share of the rent revenue, you are going to be able to sub cash, hit your bank account and not pay taxes on it. You're going to see in a little bit how this can result in tax-free refinances, where you're essentially collecting the result of the increased value without paying taxes on it. It's like getting the sale ahead of time, and you're still going to have write-offs in many of these situations as well. And you're still going to have write-offs in many of these situations as well. So let's say you're not investing passively. Let's say you have your own rental portfolio, you just got your first duplex or multifamily and you don't have real estate professional tax status. For many of you, this is your first time to access write-offs. So now we have the opportunity to have the tax deductible meals, the tax deductible travel. We have the ability to write off our supplies and our equipment. This is the first time you get to do this and it will offset the revenue to ensure, or at least maximize the probability, that you are not paying taxes on your rent revenue.
Speaker 1:Some other things to think about here is you're going to see that when you take these losses and you don't get to use these losses right, they're passive losses, they're what we call suspended losses. If you go into your tax return into form 8582, you're going to see the accumulation of all these losses. So if you're self-preparing by the way, don't worry because I was just talking to someone who did this those passive losses are automatically going to flow through onto form 8582 and they're going to collect and build, and build, and build and you'll eventually be able to use them. Not only will they offset positive cash flow when you don't have enough depreciation to offset that revenue in the future, they're also going to be able to offset the capital gain from the sale of any other passive real estate investment. So with all of these things here, imagine this you're bringing in cash from the rent revenue, you're not paying taxes on it because the depreciation will most likely offset it. And if the depreciation does it, we may consider doing a cost segregation study to accelerate that depreciation to make sure that we have enough of it. So the money's coming in and we're not paying taxes.
Speaker 1:Try doing that with your stock portfolio, and certainly when you have your W-2 job. The taxes is coming right out of your pay stub. And then again we do the cash out refis. So when you buy a property and either, it naturally appreciates along with inflation and the enhanced value of the neighborhood you're in. Or maybe you do some repairs and you may have heard of the BRRRR strategy the buy, repair, refinance, refurbish, repair, refinance, refurbish. When the value has increased you can refinance it and then you can take a loan against the increased value of the property. That's more money that's going to hit your account where you're seeing the benefits of the increased equity in your property and you're not paying taxes as that money hits your account. Not too many other places where you can do this and bring in money without paying taxes.
Speaker 1:So let's talk about how some of this could come together, especially for those of you investing into passive syndications. Let's say you invest in a passive multifamily investment and in year one you put in $100,000. In year one of that syndicated investment they're always going to run a cost segregation study and I would project, let's say, that you get a tax deduction of around $50,000 as a result of the cost segregation study. It might be more. Let's just say we get $50,000 of a tax deduction. Now that tax deduction is going to offset the future revenue from that investment. It's going to ensure that the future revenue, your share of the cash flow is going to be untaxed. Not only that, you're going to get these losses from your syndicated investments and they're going to be put into that form 85-82 that I talked about earlier. Remember when I talked about we have this reserve of all those unused suspended losses, right? So what's going to happen then If you eventually have other capital gains events? Now we can use those losses to offset the capital gains events from the other passive rentals.
Speaker 1:It's another scenario where money comes into your pocket. You're collecting the capital gains from the dispositions, from the sales, and not paying taxes because those losses are going to be pushed forward and utilized to offset the capital gain. Now let's say in year two and year three you do a cash out refi. Let's say that gets you back $30,000 of your investment. $30,000 comes in. What's the tax liability? Zero. And also let's say that you get $10,000 of a distribution of your revenue Remember that depreciation that you took. That's going to carry forward and offset that positive cash flow, that rental revenue. So you're not going to be taxes on that either. So in this example, you've gotten back 42% of your investment year one and you haven't paid a dime in taxes yet of your investment year one and you haven't paid a dime in taxes yet.
Speaker 1:So in the following years of this passive investment in this theoretical example here, you're gonna continue to collect some distributions and you're gonna see the equity in this investment grow as it's handled by experts. And what are you gonna do when your money comes back to you from either the exit of some capital gains events, the exit of some real estate, or from the cash out refis or from your share of the rental profits? And you're going to well, before I get ahead of myself, if you're investing $100,000 into real estate, you're likely setting aside additional savings from your other sources of income, so you can put all this together and invest into more real estate here and more real estate there. And because all this cash is coming in tax three, through the refis and through the rent revenue shares and through the other exits, and because you're likely paying little to no taxes, you have the ability to redeploy your savings over and over again and you're going to build and accumulate all these losses on your federal return to mitigate or completely eliminate the taxation on the exits. So here's just an example of how you can really compound your wealth and grow it time after time and collect the cash and reinvest the cash without worrying so much about paying taxes on it.
Speaker 1:Now some things to think about here. There are some ways where you could potentially use this to also reduce your taxes A few. So one idea here is qualified opportunity zones. Now that will allow you to defer your taxes if you invest passively or you can find an active investment into real estate that's in a qualified opportunity zone fund. What that's going to allow you to do is to defer your capital gains tax, and this could be capital gains from anything. It could be capital gains from the sale of a stock, from the sale of your primary residence, any type of capital gain, even the sale of your business. You could put that capital gain into the qualified opportunity zone. It will defer the gain for until the end of 2026.
Speaker 1:Now that's not so long, but the people who run these Qualified Opportunity Zone funds are very resourceful and there are ways where they can revalue your assets to reduce how much taxes is recognized when that tax is come due at the end of 2026. And they're gonna give you cash out refis to help you pay the tax bill. Not only that, but once you put that capital gain money into the Qualified Opportunity Zone. Any future growth within that QOZ is going to be pretty much tax-free wealth, because if you hold it in your qualified opportunity zone for 10 years or more, no taxation on that exit. So it's like a Roth IRA, but you don't have to wait until you're 59 and a half and some people would call a supercharged Roth IRA, because you could put a whole lot more into your qualified opportunity zone than a Roth and now you have money in that tax-free bucket. Now qualified opportunity zones are going to become an even sweeter deal in 2027.
Speaker 1:We're very excited for when this comes because eventually you'll get a step-up basis. So not only will you be deferring taxes, you'll be deferring it for five years. So think about the time value of money If you got to wait five years before you have to pay the taxes, but also you're going to see a step-up basis, typically 10% reduction in the capital gains tax as well, and it could go up to 30% if it's in a rural zone. So there's just some really cool strategies out there with QOZs. But here's some other cool stuff I want you to think about.
Speaker 1:Some of you may want to consider eventually having real estate professional tax status in the future. So investing in your long-term rentals now and building up your portfolio is going to allow you to get that momentum and build that tax advantage cash flow so you can eventually leave your W-2 job or leave your business and retire and they'll go full-time into real estate. And when that happens, maybe if you have your own rentals, that's when you time your cost segs or deploy more into other syndications where they're going to do the cost sags and potentially those losses from the real estate syndications are going to roll onto your 1040 and offset your remaining income. You can even use the losses with real estate professional tax status in the future to offset some Roth conversions. Maybe we time it out and move some 401ks and traditional IRAs into your Roth and use your rental losses in the future for real estate professional tax status. So for some of you here, even though you can't use the losses right away, this is gonna be the building blocks by which you accumulate that wealth in a tax advantage manner and the tax advantage cash flow to eventually give you enough support to leave your W-2 job. Now here are some other situations on how you may be able to use these losses to create tax savings.
Speaker 1:Some of you are going to have passive income from other sources, and by passive income I mean income where you're not materially participating in the businesses. This can't be a corporation, but we do have some of our clients where they are serial entrepreneurs and they get K-1s from all these different companies. They have a little bit of interest in a restaurant here and they have a little bit of interest in this project there and they're not really doing so much. And we may find that this is passive income. And we've seen this before where our client had all these different businesses and we were thinking to ourselves well, how much are you actually doing in these companies? And we found out it was very little and it was actually passive income. And this is especially true for some of our serial entrepreneurs who start like nine companies or even a handful. We may find that these are really ran by the employees to the point where they're not really doing so much, and we may find that they're not materially participating and therefore they may not be using the losses. So what that means for you is if you have the opportunity to create these passive income generators whether it's passive interest in a business or you may have the opportunity to create a spinoff entity in your own business or an additional business that you're not really involved in to the day to day as much, you may actually find that you already have taxable income that can be offset by these passive losses from the real estate. Also, for some of you guys investing into oil and gas, the future profits are most likely going to be passive income as well, and we could use passive losses to offset those profits of your oil and gas when we run out of that intangible drilling cost deduction and we are actually paying taxes on our profits. By the way, oil and gas that's a whole other conversation, but that is an incredible wealth building vehicle that can also offset your taxes from your W-2 or your business Total other conversation, but really exciting to see how that can also be paired with passive losses from real estate.
Speaker 1:Now here's another idea. Now I know I just threw a lot at you here, but I want you to think about how you can really think about this as just a tool that's going to grow and compound while you're earning your income from all your other sources. Knows where it's going to take you? But certainly when you look at the profitability and the tax incentives, there are some incredible opportunities here to grow your wealth, compound your wealth and take advantage of these tax incentives. And also consider the fact that long-term capital gains is tax advantage. So even if you do wind up paying taxes on some of this, you likely are going to pay a lower tax amount than you would at your W-2 job.
Speaker 1:So now here's a question. I just threw a lot at you here, but the question you may have now is okay, well, what am I going to do here to reduce my taxes Based on all the information you threw at me here? How can I fit this into my wealth building formula? How can I still save money on taxes if I'm shelling out all this money to put down payments into rental properties, or putting $100,000 into the syndication here because I want to see the profits? Well, what's in it for me and how can I optimize my situation? Well, here's what I would say to you If you can't use the rental losses to offset your W-2 or your business income, or if that's not enough, you want to prioritize your tax planning before you even think about this. Here's why, with an advanced tax reduction strategy, you're going to find that you can double your investment in year one.
Speaker 1:Imagine, instead of waiting five to six years for that $100,000 to turn to $200,000, imagine a tax strategy where you can invest $100,000 and it turns to $200,000 in year one. And consider the fact, as much as we love real estate and all the tax advantages, tax savings is going to be so much more powerful than any type of profit, because tax savings is never going to be taxed and profit can be taxed, and we didn't mention that you may see some tax liabilities on the state side. You're not going to see that with the tax plan. So we have strategies, whether it involves taking advantage in creating tax credits, maximizing your tax write-offs, write-off strategies, creating depreciation from other assets that will offset your W-2 without real estate professional tax status. It may involve advanced charitable deduction strategies, and these are some of those strategies that can be incredibly powerful, could offset as much as 60% of your income, and these are strategies where you're turning 100,000 into 200,000, a half a million into a million, depending on what your bracket is Advanced entity planning, spin-off entities and one of the things I'm most excited about is we have these solar strategies where you're buying and renting out solar panels.
Speaker 1:We can eliminate 75% of your year one taxes and then you can get back 75% in each of the prior three year taxes. And let me tell you that the cost to create these tax savings is less than the benefit. Typically, in this example, you're turning $1 into $1.35. So this is what you should be doing first. This is the fastest wealth building vehicle you can have is by creating the tax savings. If you can cut your tax bill by 50 to 100%, if you could save $50,000, $100,000, half a million in taxes for a fraction of the cost, that's going to be the fastest way to see ROI.
Speaker 1:Now you may be thinking to yourself what am I going to do with my $100,000 tax refund or my $50,000 refund? What am I going to do with all this tax savings now that I'm not making quarterly payments? Well, you want to grow it in a tax advantage manner, and one really wonderful way to do that is to now invest into these syndications and into other long-term rentals that you may manage yourself, because that is going to allow you to take your tax savings and grow in a tax advantage manner, where you're building your wealth and it's compounding because you're not paying taxes on all the economic benefits, and that's going to allow you to protect your fortune and your tax and your fortune and your tax savings and grow in a way where you're protected from future taxation from the irs. I mean, I'm not sure if I said that so clearly, but essentially this is going to allow you not only to create massive tax savings but then grow it and compound it year after year, without the economic benefits and the profits all going to uncle sam right. We're building our wealth in a tax advantage manner and protecting it from future taxation, but the first priority I need you to think about is the tax savings, because that's going to give the highest ROI.
Speaker 1:Now, if any of this sounds interesting and you want to see how this applies First, you can go to taxplanningchecklistcom for a free checklist and mini course to expose you to these ideas and maybe start to evaluate how some of this could apply to you and start taking action. Evaluate how some of this could apply to you and start taking action. And if you want to get started right away and see an opportunity report where we are going to evaluate how these concepts apply to you, based on your situation and what you answer in a survey, and you'll be exposed to ideas that I promise you've never heard of before. Go to prosperalcpacom slash opportunity report. Thanks for listening. Have a wonderful day. We got more great insight coming your way.