{"id":182925,"date":"2025-05-21T14:34:56","date_gmt":"2025-05-21T20:34:56","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=182925"},"modified":"2025-05-21T14:34:59","modified_gmt":"2025-05-21T20:34:59","slug":"billionaire-tax-loopholes-anyone-can-do-themselves","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/billionaire-tax-loopholes-anyone-can-do-themselves","title":{"rendered":"Can You Use the Same Tax Loopholes as Billionaires to Slash Your Tax Bill?"},"content":{"rendered":"\n

You can stamp your foot and complain about the wealthy using loopholes to lower their tax bills. Or you can learn those tax loopholes yourself. Try these strategies to slash your tax bill, many of which involve real estate investments. <\/span><\/p>\n\n\n\n

1. Borrow Instead of Selling<\/span><\/h2>\n\n\n\n

You only owe capital gains tax when you sell an asset. So? Don\u2019t sell. Borrow against the asset instead and write off the interest. <\/span><\/p>\n\n\n\n

Say you buy a long-term rental property with a 15-year mortgage. Over 15 years, your tenants gradually <\/span>pay off<\/span> your loan, and you collect increasing <\/span>cash flow<\/span><\/a>. <\/span>Once you\u2019ve paid off the property in full, you could keep <\/span>the property<\/span> for cash flow<\/span>, <\/span>or <\/span>you could<\/span> sell it to cash out.<\/span> <\/span><\/p>\n\n\n\n

Better yet, you can have it both ways. You refinance the property to cash out 80% of its value while keeping the property and continuing to earn cash flow. <\/span><\/p>\n\n\n\n

Best of all, you don\u2019t pay a dime in capital gains taxes. Quite the contrary: You get to write off the new mortgage interest. <\/span><\/p>\n\n\n\n

You can keep repeating that cycle <\/span>over and over<\/span>, cashing it out every 15 (or 30) years. When you retire, you can live on the rental income. <\/span>When you kick the bucket, the cost basis resets and your children inherit it<\/span>, <\/span>possibly tax-free if your estate is below the estate tax exemption.<\/span> <\/span><\/p>\n\n\n\n

2. Solo 401(k)s<\/span><\/h2>\n\n\n\n

In 2025, the contribution limit for IRAs is $7,000 for those under <\/span>50,<\/span> and $23,500 for 401(k)s. <\/span><\/p>\n\n\n\n

But solo 401(k) holders can contribute up to $70,000. Through it, they can invest in (almost) anything they want, including active investments like rental properties and passive investments like real estate syndications, <\/span>private partnerships<\/span><\/a>, private notes, and funds. <\/span><\/p>\n\n\n\n

Many of the investors I invest alongside <\/span>every month<\/span> in SparkRental\u2019s Co-Investing Club use self-directed IRAs and solo 401(k)s to invest in these <\/span>kinds of<\/span> passive real estate investments.<\/span> We can each invest as little as $5,000 at a time. <\/span><\/p>\n\n\n\n

And yes, you can open a solo Roth 401(k). <\/span><\/p>\n\n\n\n

3. Backdoor Roth Contributions<\/span><\/h2>\n\n\n\n

Earn too much money to contribute to a <\/span>Roth IRA<\/span><\/a>? <\/span>Contribute to a traditional IRA<\/span>, <\/span>and <\/span>then<\/span> convert the funds to a Roth IRA.<\/span> You can\u2019t deduct the contribution since your income is over the limit to do so, but you can still contribute and then convert to a Roth account. <\/span><\/p>\n\n\n\n

It\u2019s known as a \u201cbackdoor\u201d Roth contribution for reasons that explain themselves. <\/span><\/p>\n\n\n\n

Oh, and there\u2019s no income limit on solo Roth 401(k)s, so you can <\/span>funnel money there as well<\/span>.<\/span> <\/span><\/p>\n\n\n\n

4. Carry Losses Forward<\/span><\/h2>\n\n\n\n

When you take business or investment losses, you can (and should) carry them <\/span>forward<\/span> to the next tax year to offset future income. <\/span><\/p>\n\n\n\n

Use those net operating losses to offset up to 80% of your income in future years. Keep carrying them forward indefinitely.<\/span><\/p>\n\n\n\n

Real estate syndications offer <\/span>particularly<\/span> juicy losses on paper, especially in the first few years. <\/span>You get to write off<\/span> a <\/span>massive <\/span>amount of<\/span> depreciation, even as you collect cash flow from distributions.<\/span> That, in turn, sets the stage for all kinds of fun strategies. <\/span><\/p>\n\n\n\n

5. Depreciation and the \u201cLazy 1031 Exchange\u201d<\/span><\/h2>\n\n\n\n

You probably know that real<\/span> estate investors can deduct the cost of the buildings they own, spread out over 27.5 or 39 years for residential or commercial properties.<\/span> <\/span><\/p>\n\n\n\n

You might not be as familiar with accelerated depreciation through <\/span>cost segregation studies<\/span><\/a>. Real estate syndicators reclassify as much of the building as possible to other tax categories that allow faster depreciation, often five or seven years. And passive investors get the full tax benefits of ownership, so they get to write off those \u201closses.\u201d <\/span><\/p>\n\n\n\n

It sets the stage for the \u201c<\/span>lazy 1031 exchange<\/span><\/a>\u201d strategy, which our investment club loves. <\/span>Rather than <\/span>have to<\/span> jump through all the hoops of a <\/span>normal<\/span> 1031 exchange (more on that momentarily), <\/span>all you have to do is<\/span> invest in a new syndication in the same calendar year as you show gains<\/span>.<\/span> The<\/span> huge<\/span> depreciation write-off from the <\/span>new<\/span> investment offsets the <\/span>gains<\/span> from your previous investments.<\/span><\/p>\n\n\n\n

6. 1031 Exchange<\/span><\/h2>\n\n\n\n

Alternatively, you could do a formal <\/span>1031 exchange<\/span><\/a>. It involves hiring a qualified intermediary, handing over your gains to them, identifying a new property to buy within 45 days of selling the old one, and closing on the new property within 180 days. <\/span><\/p>\n\n\n\n

That\u2019s always sounded like too much work to me, but <\/span>then again,<\/span> so does active investing.<\/span> I prefer to <\/span>invest passively<\/span><\/a> and save myself the headaches. <\/span><\/p>\n\n\n\n

7. Shift Income to Long-Term Gains<\/span><\/h2>\n\n\n\n

If you sell an asset within a year of buying it, you pay taxes at the normal income tax rate. If you hold assets for at least a year, you pay at the lower long-term capital gains tax rate. <\/span><\/p>\n\n\n\n

The wealthy prefer the latter.<\/span><\/p>\n\n\n\n

Rather than day-trading stocks, hold them for a year. Rather than flipping houses, keep them as long- or short-term rentals for a while. <\/span>Collect some cash flow and sell when the market\u2019s right\u2014or <\/span>just<\/span> keep borrowing against them and never sell <\/span>at all<\/span>.<\/span> <\/span><\/p>\n\n\n\n

8. Combining Business and Pleasure<\/span><\/h2>\n\n\n\n

The wealthy know how to write off their travel by doing some business on each trip. <\/span><\/p>\n\n\n\n

Want to take a Vegas vacation? Plan your trip to coincide with a conference you\u2019d also like to attend <\/span>there<\/span>. Want to go on a hiking trip in the Pacific Northwest? Have lunch with a business client, supplier, or prospect after your plane lands before hitting the trail. <\/span><\/p>\n\n\n\n

Just be careful not to get too greedy with these. If <\/span>you\u2019re ever audited<\/span>, you need to be able to make a defensible argument\u2014supported by documentation\u2014for why you deducted the trip as a business expense. Speak with a tax professional to get clear on the <\/span>rules of the game<\/span>. <\/span><\/p>\n\n\n\n

9. The Power of Trusts<\/span><\/h2>\n\n\n\n

The wealthy sometimes use trusts to move assets out of their estate and pass them on tax-free to heirs. Trusts can also provide asset protection to shield your assets from ambulance chasers and lawsuits. <\/span><\/p>\n\n\n\n

Finally, trusts give you more control over your assets and bequests. But they can be complex and expensive to set up, so speak with an attorney before making any decisions. <\/span><\/p>\n\n\n\n

10. Strategic Tax Credits<\/span><\/h2>\n\n\n\n

Americans<\/span>, <\/span>at every point on the income spectrum<\/span>, can take advantage of tax credits<\/span>.<\/span> <\/span><\/p>\n\n\n\n

For example, lower-income Americans can take the Saver\u2019s Credit when <\/span>they contribute<\/span> to retirement accounts. Most parents qualify for the Child Tax Credit, available to single parents earning up to $200,000 and married couples up to $400,000. Some also qualify for the Child and Dependent Care Credit, as do many adult children of ailing parents. <\/span><\/p>\n\n\n\n

Wealthy Americans often <\/span>take advantage of<\/span> credits like the Low Income Housing Tax Credit (LIHTC) in their real estate investments. Or they invest in Qualified Opportunity Zones. <\/span><\/p>\n\n\n\n

Nor do you have to be rich to take advantage of those tax breaks. In my club, we\u2019ve invested passively in LIHTC properties with $5,000 apiece. <\/span><\/p>\n\n\n\n

Tying Together Tax Loopholes<\/span><\/h2>\n\n\n\n

The rich know the rules of the tax game, which is why they keep winning it. The poor and middle classes play a different game <\/span>altogether<\/span>: the \u201ccomplain game,\u201d where the only prize is a sense of soapbox superiority. But it\u2019s a lot easier to play that game.  <\/span><\/p>\n\n\n\n

Which game would you rather play and win? <\/span><\/p>\n\n\n\n

The other members of our co-investing club and I look to combine as many <\/span>of these tax strategies as we can<\/span> without all the headaches of becoming landlords.<\/span> After all, do you think the truly wealthy are out there hassling with tenants and toilets and permits and contractors? <\/span><\/p>\n\n\n\n

Nope. They\u2019re investing in private equity real estate, private partnerships, and private notes\u2014and mixing and matching these various tax loopholes to earn high returns with low taxes.<\/span><\/p>\n\n\n","protected":false},"excerpt":{"rendered":"

You can stamp your foot and complain about the wealthy using loopholes to lower their tax bills. Or you can learn those tax loopholes yourself. Try these strategies to slash […]<\/p>\n","protected":false},"author":158586,"featured_media":182927,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7377],"tags":[],"class_list":["post-182925","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-strategies"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/182925","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=182925"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/182925\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/182927"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=182925"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=182925"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=182925"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}