Any High W2 earners out there?

58 Replies

To the High W2 earning BP members out there, what strategies have you used to decrease your W2 taxable income? Depending on what state you earn your wages, income tax rates of 40-50% are unreasonable. Most of you likely don’t qualify as real estate professionals and won’t unless you quit or dramatically reduce your regular work hours so what tax planning strategies (particular to real estate investing) have you used besides taking depreciation and mortgage interest deductions? I realize that with enough properties, you can eventually replace your W2 with passive income and deduct losses against it. Do you massively leverage your high income to get loans and build your portfolio fast? Paying multiple three figures in taxes plus FICA is simply ridiculous. Thanks in advance!

let me know when you figure it out. The only things that i have found to reduce my tax bill are working less and contributing the max to my 401k. My rentals keep making money that i have to pay more tax on. I guess there's worse problems...

I’m not what you’d probably consider a high income individual but of those that I know who are, one way to reduce your taxes is long term capital gains which are taxed at a maximum rate of 23.8 percent.

Now this wouldn’t offset your w2 income but it would help you earn more money (through long term investments), that you would pay less on.

No tax advice given

I don't have a super high W2 income, but have been able to double it over the last few years. This has allowed me to have a low enough DTI to finance several flips at a time with a traditional lender. I don't have any good ways to reduce taxes on my W2 income.

@Bilal A.

Maxing out your 401k and spouse's 401k is a start. I recommend that you contact a financial advisor or tax advisor to create a plan specifically tailored to your needs. With the new tax law a good financial or tax advisor could save you thousands of dollars. Good luck and let me know if I can be of assistance.

@Bilal A.

Maxing out your 401k and spouse's 401k is a start. I recommend that you contact a financial advisor or tax advisor to create a plan specifically tailored to your needs. With the new tax law a good financial or tax advisor could save you thousands of dollars. Good luck and let me know if I can be of assistance.

@Mike Landry Working less doesn't seem to be in my blood, well not at this point in my life. I guess most of us are programmed as such 😀. I have done the 401k option, self directed Roth IRA, backdoor Roth contributions. As I begin my real estate investing journey to be able to generate passive income for the day that i want to slow down/step back, I realize the same thing that you mentioned about having to pay tax on real estate income at ordinary rates right now if I don't show with enough "stuff" to offset that income. There are plenty of ways to offset rental income and capital gains but I am frustrated at the lack of options available that make an immediate and large impact on W2 income.

@Caleb Heimsoth Great point! Haven’t thought that far in advance but another big reason to invest in real estate early and go big. 

@Eric James Yes, I have given that some thought. In fact, that is exactly how I was able to finance my first four plex. Flipping will be very time consuming and potentially highly taxed income from what I understand. I have had discussions with my wife  about highly leveraging income to scale up fast and go big. It is an option but before I go down that route, I wanted to see if there are ways to reduce my W2 income tax bill right now. Decreasing W2 taxable income will generate immediate return rates that are unparalleled by most and get back hard earned money. 

I like to put as much as possible in retirement at my W2 job because not only is it tax deferred, but I can borrow against it. It's like an equity line of credit only I pay the interest back to myself instead of a lender. Truly one of the best benefits in the system.

Disclaimer: I am not giving Tax advice and you should consult your tax advisor or CPA. 

In 2018, I will be doing the following in order to potentially impact my W2 tax bill. 

My wife is a stay at home mom (a huge sacrifice she made for the benefit of our kids and a mostly thankless and non-paid job). She will be getting her real estate license and are equal partners in this venture. She has already taken the classes and is scheduled to take the exams in the next month. Given that we file jointly at the end of the year, instead of having to keep deferring/carry over losses etc from real estate to the following tax year, we plan on deducting them a 100% against my W2 income. That is the the only viable way I have come up with to bypass the “real estate professional” exclusion which I am held to. 

I am hoping that this approach and acquiring more real estate will hopefully have a big impact only tax bill at the end of the year.

I am still looking for other ways that will have an immediate and sizable impact on my W2 tax bill. 

"if you are under 50 years old, you can contribute a maximum of $18,000. If you're 50 or older, you can make an additional catch-up contribution of as much as $6,000, for a total of up to $24,000."

"If you and your spouse both have 401(k) accounts through your jobs, you can each defer paying taxes on $18,000 in 2016, or as much as $36,000 as a couple. And once you turn age 50 or older, you can each contribute an additional $6,000 to a "

So you are maxing this much money for your 401-k?

My wife is maxing her 401-k out .

If you qualify for an HSA Plan, make sure you max out your 2017 contribution before 4/15. Gives you a deduction on page 1.

Having your wife do real estate so you can write off your losses would be huge. I am trying to get my wife to do the same thing. Thanks,

Originally posted by @Bilal A. :

Disclaimer: I am not giving Tax advice and you should consult your tax advisor or CPA. 

In 2018, I will be doing the following in order to potentially impact my W2 tax bill. 

My wife is a stay at home mom (a huge sacrifice she made for the benefit of our kids and a mostly thankless and non-paid job). She will be getting her real estate license and are equal partners in this venture. She has already taken the classes and is scheduled to take the exams in the next month. Given that we file jointly at the end of the year, instead of having to keep deferring/carry over losses etc from real estate to the following tax year, we plan on deducting them a 100% against my W2 income. That is the the only viable way I have come up with to bypass the “real estate professional” exclusion which I am held to. 

I am hoping that this approach and acquiring more real estate will hopefully have a big impact only tax bill at the end of the year.

I am still looking for other ways that will have an immediate and sizable impact on my W2 tax bill. 

 First of all... THANK YOU for giving your wife props for her contribution as a homemaker.

Next, once she is licensed, you WILL be able to file as a real estate professional (since you file jointly, only 1 of you needs to qualify as a real estate professional).  

One thing to remember as you choose not to defer or carry over losses is that as those losses chip away from your W2 income, it reduces your overall income, which may affect you when it comes to quailfying for a loan. So, just be aware. You may be reducing your tax burden, but also losing opportunities to obtain a loan because your DTI is too high.

@Cara Lonsdale and @Bilal A. getting a real estate licenses is irrelevant for being a real estate professional for income tax purposes and will not, by itself, make someone qualify as a RE pro.  Bilal, you say:

Given that we file jointly at the end of the year, instead of having to keep deferring/carry over losses etc from real estate to the following tax year, we plan on deducting them a 100% against my W2 income.

So, that sounds like you're expecting her to qualify as a "real estate professional".  In order to do that she must spend 750 hours a year doing real estate related work AND more hours doing RE work than anything else.  If she actually works as an agent, and puts in 750 hours a year (about 15 hours a week), then she will qualify as a RE pro for taxes.  Just having the license doesn't mean she's a pro.  And she can put in the 750 hours without a license and still qualify for the IRS.

I own a lot of vacant land in Florida where I write the taxes off my income. We have no state income tax, so the new tax bill will allow me up to $10k which I should surpass slightly.  It's a good hedge and I don't need to deal with any tenant. I ride the growth wave of around 25% annually. 

I started buying again in 2015 after almost 9 years. If the DOW Jones is any indication we should go on to make new highs, especially in Florida where I expect a ton of early retirees from NY, NJ, IL and CT who want to take advantage of our tax status.

The city I live in (pop. 180k) needs to build 2500 new homes every year for the next 40 years to keep up with prior growth projections. I think you can bump that up by 10% with the new tax bill. In any given month there are 600 vacant lots and 900 homes for sale.

It's going to take high tax states a few cycles to vote in the right politicians who will avoid all of the SJW activism and pay closer attention to the budget.

Originally posted by @Jon Holdman :

@Cara Lonsdale and @Bilal A. getting a real estate licenses is irrelevant for being a real estate professional for income tax purposes and will not, by itself, make someone qualify as a RE pro.  Bilal, you say:

Given that we file jointly at the end of the year, instead of having to keep deferring/carry over losses etc from real estate to the following tax year, we plan on deducting them a 100% against my W2 income.

So, that sounds like you're expecting her to qualify as a "real estate professional".  In order to do that she must spend 750 hours a year doing real estate related work AND more hours doing RE work than anything else.  If she actually works as an agent, and puts in 750 hours a year (about 15 hours a week), then she will qualify as a RE pro for taxes.  Just having the license doesn't mean she's a pro.  And she can put in the 750 hours without a license and still qualify for the IRS.

 You're right, but my assumption was that, with a sizable portfolio, it wouldn't be hard to put in the hours.  She has to work at least 50% or more in Real Estate, which if RE is her only income producing job, then that is covered.

For the best answers, check out this power point. :)

https://www.irs.gov/pub/irs-utl/33-Real%20Estate%2...

Thanks to everyone for sharing. My wife and I are both high income earners and I never considered reducing my w-2 taxable income in order to offset rental income. Good strategy though now that I junk about it. My only concern is how reducing my taxable income would impact my ability to qualify to borrow more money from the banks.

I do like the strategy one member mentioned about maxing out the 401k to borrow against especially for the low pay back rate. Reducing my taxable income is definitely something I will consider later but for 2018, I’m on a rampage to save as much as my earned income as a down payment on my first rental property.

I don't see any mention of currently having a sizeable portfolio.  If she's going to spend time finding, acquiring and fixing up properties, I agree that that work should be enough to meet the 750 hours requirement.  But, again, its the 750 hours that are required and not the license.  She can leverage that by acting as the agent on both the purchases and sales.

Do keep in mind, @Bilal A. that being able to deduct your passive losses against ordinary income is a double edged sword.  Part of your passive losses will undoubtedly be the depreciation deduction.  That has the effect of reducing your basis and increasing your gain when you sell.  When you sell, there is tax on the depreciation portion of the gain at a higher rate than just capital gains.

And I disagree that flipping is highly taxed.  Its not.  Its just an active business like selling shoes or manufacturing widgets and is taxed that same as any other active business.

Most if not all of your business expense deductions, when done correctly can help to decrease your income. Travel/hotel/mileage, meals, office equipment/supplies/furniture, cell phones (including all monthly fees), all subscriptions (print/digital), REIA fees, conferences, education. I'm sure I'm missing more ways. Your kids can also be used once they're old enough to work (if you hire them before they're 17 there's no social security tax). Hiring them as employees you're allowed to deduct their salaries from your business income.

Originally posted by @Bilal A. :

To the High W2 earning BP members out there, what strategies have you used to decrease your W2 taxable income? Depending on what state you earn your wages, income tax rates of 40-50% are unreasonable. Most of you likely don’t qualify as real estate professionals and won’t unless you quit or dramatically reduce your regular work hours so what tax planning strategies (particular to real estate investing) have you used besides taking depreciation and mortgage interest deductions? I realize that with enough properties, you can eventually replace your W2 with passive income and deduct losses against it. Do you massively leverage your high income to get loans and build your portfolio fast? Paying multiple three figures in taxes plus FICA is simply ridiculous. Thanks in advance!

Usually starting a side business or rental investment works best for the high earner. Besides tax advantages, there is a high return via the real estate appreciation (both long-term and short-term). 

When I think about it, someone else is making you more rich by making your mortgages payments too.

Strictly speaking from the tax perspective:

1) With depreciation (phantom expenses), you will always have more cash flow than actual Income that you show on your return. Sometimes you have cashflow even when you have a loss from the tax perspective.

1) you could deduct 25k of a passive rental loss against your W-2 ( ordinary income) limited to phase out starting 100k.

2) if you are such a high earner, you can offset the passive loss that you generate via rental properties to the other passive income ( investment in the partnership as a limited investor or any other business where you materially do not participate). High earner should generally invest 85% in the safe market and 15% of the aggressive market ( start-ups).

3) If you have rentals and are such a high earner, you can hire your children so that they don't have to pay taxes on some of your income ( limited to standard deduction) or pay them more than the standard deduction and they still pay fewer taxes.

4) You can time the disposition of the rental property right so that when you have very high income in a year, you can dispose the rental property and use all the suspended passive loss that you were not allowed to take because of your high earnings in the prior year ( this loss can be substantial)

5) if you plan it right, you can convert some of the personal purchases to rental expenses ( lawn mowers, Ipads, laptops you get it)

6) some of the vacation travel might be planned right to make it a business trip and get tax deductions.

There are much more.. ..

@Bilal A.  just getting your RE license won’t allow you to deduct all those losses.  In order to not be capped at the 25k loss limit you need to be a real estate professional so your wife needs to do 750 hours or more of active real estate work and not do more than that at any other job, then you can do as you described.

Another interesting way to reduce taxes is called conservation easements.  You buy land, donate it to conservation (pay someone to create a much higher appraisal value) and then take a loss based on that value.  This is legal but is a bit of a grey area in my opinion.  Fortune article had a good article recently about this.  

Not tax advice given 

Originally posted by @Bilal A. :

To the High W2 earning BP members out there, what strategies have you used to decrease your W2 taxable income? Depending on what state you earn your wages, income tax rates of 40-50% are unreasonable. Most of you likely don’t qualify as real estate professionals and won’t unless you quit or dramatically reduce your regular work hours so what tax planning strategies (particular to real estate investing) have you used besides taking depreciation and mortgage interest deductions? I realize that with enough properties, you can eventually replace your W2 with passive income and deduct losses against it. Do you massively leverage your high income to get loans and build your portfolio fast? Paying multiple three figures in taxes plus FICA is simply ridiculous. Thanks in advance!

The best way to lower taxes is to get people who represent us in congress, and lower our taxes. The only problem I seen is that there are alot of high income earners who don't mind paying 50% in taxes, they are use to it. If there are more people like you, have them contact me and we can make some real change.

Originally posted by @Cara Lonsdale :
You're right, but my assumption was that, with a sizable portfolio, it wouldn't be hard to put in the hours.  She has to work at least 50% or more in Real Estate, which if RE is her only income producing job, then that is covered.

For the best answers, check out this power point. :)

https://www.irs.gov/pub/irs-utl/33-Real%20Estate%2...

Thanks for the link. Does the 50% rule have to coincide with the 750 hours, or are they mutually exclusive?

Originally posted by @Yonah Weiss :
Originally posted by @Cara Lonsdale:
You're right, but my assumption was that, with a sizable portfolio, it wouldn't be hard to put in the hours.  She has to work at least 50% or more in Real Estate, which if RE is her only income producing job, then that is covered.

For the best answers, check out this power point. :)

https://www.irs.gov/pub/irs-utl/33-Real%20Estate%2...

Thanks for the link. Does the 50% rule have to coincide with the 750 hours, or are they mutually exclusive?

 It is my understanding of the irs code that both need to apply. 

If you use a tax program like turbo tax, it will ask you the appropriate qualifying questions and file accordingly. 

Again, if one of you qualifies, then you both do if filing jointly. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here