Out of state investing tax benefits.

Member since 2022 · 13 posts · 11 votes

Hi BP Family,

I live in California and am about to start investing out of state. I have a CPA that I've used for years but when I brought up the investment to him he said my wife and I combined make too much money so there will be no tax benefits i.e. write offs, depreciation. The real estate outfit I met with out of state says that they have California investors, and they tell a different story. Combined my wife and I make around $270,000 which sounds like a lot but in the SF Bay area its barely getting by. Any help would be greatly appreciated!

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Katie Balatbat

CPA and Attorney · San Diego, attorney · Member since 2022 · 302 posts · 219 votes

@Jason Frink

As others have said, perhaps your CPA isn't quite explaining things properly or clearly enough? Generally, you probably will still qualify for some tax breaks against the rental income itself, but perhaps he/she meant that you may not be able to use any real estate losses to offset your ordinary wages, interest, dividends, etc? If your CPA isn't comfortable or knowledgeable about real estate investing, it may be time to seek out a new CPA.

Also, if you haven't completed your estate planning yet, if you own real property, now may be a good time to consider that for your family. There also may be ways to enjoy some tax benefits in other types of taxes like gift and/or estate taxes, depending on your goals and family situation, if those are topics that you want to discuss with your estate planning & tax attorney as well.

*This post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

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Benjamin AakerPro Member
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
2y
I would say your CPA isn't entirely correct. You likely won't be able to take any deductions on your personal income, but real estate does have tax benefits. You can claim depreciation on the owned property and this can offset the income from the property. Since you have good income, you should try to maximize equity build rather than cash flow (which you will pay taxes on if you take out of the property to pay yourselves). Set this up by doing the math and getting the right loan so that your place nearly breaks even after a capital expenditure account is paid (for those big ticket items).
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Benjamin WeinhartBusiness Member
Accountant · Cincinnati OH 45245, USA · Member since 2022 · 112 posts · 112 votes
2y
I'm not entirely sure what your CPA is using as their thought process. Depending on how you set it up, it won't reduce your earned income, but there may be benefits to making the rent itself tax-free for many years or at least reduced (assuming you never recapture depreciation). If you're investing out of state, you will almost certainly be classified as a passive investor which just means you can only use (paper) losses to offset income from other rentals/passive activities.
At the end of the day though, look at the tax side of things as a nice cherry on top rather than the thing that makes a deal work for you. You can adjust this mindset of course as you get more experienced in it years later, but try to ignore the tax benefits as you're first starting out. This is the more conservative approach, and this mindset will pay dividends for you in the future.
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Arn CenedellaPro Member
Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
2y
@Benjamin Aaker is on the money.
Your income probably prevents you from using RE to offset your W2 income but you can still use deductions and depreciation to offset rental income.
If you are looking to REI to reduce your taxable income on your W2 earnings REI won't help much at all.
One needs to be precise when discussing tax law.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Arn Cenedella:

@Benjamin Aaker is on the money.
Your income probably prevents you from using RE to offset your W2 income but you can still use deductions and depreciation to offset rental income.
If you are looking to REI to reduce your taxable income on your W2 earnings REI won't help much at all.
One needs to be precise when discussing tax law.

Indeed! That w2 still does not limit you to things like the short term rental loophole for instance, which can help you offset those painful CA taxes. At least the weather is nice :P Best of luck!
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Greg ParkerBusiness Member
Realtor, Contractor, Property Manager · Montgomery AL and Kowaliga, AL · Member since 2017 · 670 posts · 536 votes
2y
Sounds like step number one is to find a new CPA. One that has a lot of property investor clients.
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Katie Balatbat
CPA and Attorney · San Diego, attorney · Member since 2022 · 302 posts · 219 votes
2y
@Jason Frink
As others have said, perhaps your CPA isn't quite explaining things properly or clearly enough? Generally, you probably will still qualify for some tax breaks against the rental income itself, but perhaps he/she meant that you may not be able to use any real estate losses to offset your ordinary wages, interest, dividends, etc? If your CPA isn't comfortable or knowledgeable about real estate investing, it may be time to seek out a new CPA.
Also, if you haven't completed your estate planning yet, if you own real property, now may be a good time to consider that for your family. There also may be ways to enjoy some tax benefits in other types of taxes like gift and/or estate taxes, depending on your goals and family situation, if those are topics that you want to discuss with your estate planning & tax attorney as well.
*This post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
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Jason Frink
OP
Member since 2022 · 13 posts · 11 votes
2y
All good information!
What about travel/hotel/rental car to view properties? Would that be written off as an expense against the property owned out of state?
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Benjamin WeinhartBusiness Member
Accountant · Cincinnati OH 45245, USA · Member since 2022 · 112 posts · 112 votes
2y
Quote from @Jason Frink:

All good information!
What about travel/hotel/rental car to view properties? Would that be written off as an expense against the property owned out of state?

Yes, but the travel must only be used for business purposes. The IRS deems expenses as qualifying business expenses if they're "Ordinary and Necessary". Meaning that a portion might not be able to be expensed if you're doubling the trip as a vacation, and it can't be anything extravagant (there's a lot of nuance with this). Meals are also only deductible at 50%.
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Jason Frink
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Member since 2022 · 13 posts · 11 votes
2y
The trip I just took from SF to Tennessee was solely to take a tour with a real estate investor and to drive around to look at property.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
2y
In general, rental related real estate, is considered a passive activity.
That means, that passive losses, are not eligible to offset income such as wages, interest, dividends,etc.

However, I would still argue that real estate is great from a tax perseptive, making $270,000 you are likely in the 30%+ tax bracket when you factor in Federal and state taxes.

Rental income, which is normally shielded by depreciation, will not be subject to the 30% tax as would interest and dividends.

Best of luck.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Greg Parker:

Sounds like step number one is to find a new CPA. One that has a lot of property investor clients.

Indeed! A switch to a real estate focused accountant can do wonders for your financial future. Perhaps I'm a bit biast tho :P
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Jason WatsonBusiness Member
CPA · Colorado Springs, CO · Member since 2024 · 98 posts · 83 votes
2y
I'm late to the party as usual... but your CPA is not correct as a zillion posters already said. I will add this- your CPA is narrow minded on taxes only. Let's say there is zero tax benefit to be had... fine... what about building wealth? I tell my clients all the time that building wealth is your #1 priority, not saving taxes. Rental properties and investments accomplish the wealth build... and if they also offer a tax benefit that is just icing on the wealth cake.

Build wealth! Lots of it. Save / defer taxes if you can.
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Jason Frink
OP
Member since 2022 · 13 posts · 11 votes
2y
Thanks for your reply! Just so you know my CPA didn’t say not to invest just that it wouldn’t offset my W2 income…….otherwise he said go for it! And I agree paying more taxes means you’re making more money…….doesn’t mean I have to like it though! Hahaha
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Jake AndronicoBusiness Member
Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
2y
@Jason Frink
I grew up just north of San Francisco. $270K is super strong but like you said it's all relative (especially out there).
Not to beat a dead horse, but sounds like your CPA isn't correct. We have Northern CA investors investing in Reno, NV to be close by but take advantage of the tax benefits all of the time.
Best of luck to you!
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Bill SchrimpfBusiness Member
Real Estate Agent · Reno, NV · Member since 2014 · 353 posts · 189 votes
2y
@Jason Frink - @Arn Cenedella and @Benjamin Aaker are probably correct. The vale of depreciation on property as well as business loss are capped if you have high W2.
I really like your last comment though, seem you have the correct mindset. I invest to make money, although I always keep an eye on taxes, taxes are a secondary concern to the investment.
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