Rental Property Investor · Honolulu, HI · Member since 2018 · 11 posts · 17 votes
HELP OFFSET HIGH W2 INCOME! As the end of the year quickly approaches, I have maxed out my 401k and wife’s 401k and both IRAs. We have a primary residence and a Airbnb rental unit that we own and manage. We purchased the rental this year.
Neither of us will qualify as “real estate professionals”. We have another 50k liquid (asIde from reservse) and I am wondering what I should be doing with this money in the next 2 months to potentially offset this years very high W2 income.
We operate the property mangement out of an llc.
Would buying another house help this equation significantly? Is there a simple solution that I am missing?
Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
7y
Here's what you gotta do. Go to your employer and tell them hey you need to stop paying me because all this money is going to cost me too much in taxes. Then at the end of the year you'll have a lower W-2, maybe significantly lower. ;) HAPPY FRIDAY!
HELP OFFSET HIGH W2 INCOME! As the end of the year quickly approaches, I have maxed out my 401k and wife’s 401k and both IRAs. We have a primary residence and a Airbnb rental unit that we own and manage. We purchased the rental this year.
Neither of us will qualify as “real estate professionals”. We have another 50k liquid (asIde from reservse) and I am wondering what I should be doing with this money in the next 2 months to potentially offset this years very high W2 income.
We operate the property mangement out of an llc.
Would buying another house help this equation significantly? Is there a simple solution that I am missing?
Buying a house would give you depreciation. You can achieve your goal like this:
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
7y
@Max T. having a real estate license does not help in claiming the RE Pro status unless the taxpayer switches from the W-2 job and becomes a salesperson full-time.
@Stephen Thomas there are things you can do but it largely depends on your current structure of income streams and exactly how much those income streams are brining in. There are ways to drastically offset W-2 income but I wouldn’t know if they are good ideas for you without seeing your entire financial picture.
Rental Property Investor · Philadelphia, PA · Member since 2016 · 191 posts · 165 votes
7y
@Matt Millard@Stephen Thomas I've been thinking of ways to offset my W-2 income as well before year end. My primary focus has been to accelerate any repairs and maintenance jobs to perform this year so I get more passive losses. Also to buy any business equipment or supplies this year as well. Once I exhaust those options, I plan on contributing maximum to my and my wife's IRAs. I've also maxed out HSAs and any flexible spending accounts offered by my employer since the beginning of the year. I'm also looking forward to the increased child tax credit thanks to the new tax bill. The refundable portions of the credit should help me offset my PA state taxes nicely.
Rental Property Investor · Honolulu, HI · Member since 2018 · 11 posts · 17 votes
7y
@Sung Park Love it. The suggestions of repairs and maintenance is exactly the type of brainstorming I was looking for. Anything else like this would be super helpful.
Rental Property Investor · Honolulu, HI · Member since 2018 · 11 posts · 17 votes
7y
@Account Closed thanks for the suggestions, I tried reading the post but maybe I'm missing something or your link got mixed up, I didn't see depreciation in there. Sorry if I totally missed it.
DEPRECIATION: Let me see if I have this right? So if I have an extra 50k, and I purchase a house by December of this year worth 250k where the structure is worth 200k of that 250k, could I offset 3.6% or $7270 in depreciation? At at 33% tax bracket, Im saving about in federal taxes.
I think I need a bigger shove that that.. am I missing something? Im sure I am missing a whole lot... eager to learn.
Don't get too excited with discussions of repairs, depreciation, multifamily etc. All of those things only create more passive losses, and you cannot benefit from passive losses. In short: nothing related to the usual rental properties can offset your W2 income, sorry.
I'm just a messenger.
Now, if your AirBnB unit offers short-term stays, a la hotel, then it is not passive. Then you might be able to generate some losses from that unit, via depreciation and repairs. But we would need to know the details of how you operate the AirBnB. And you can only squeeze some modest savings out of it.
So, I'm intrigued by a strong statement from my colleague @Brandon Hall that "There are ways to drastically offset W-2 income." Wonder what Brandon had in mind by drastically.
Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
7y
Here's what you gotta do. Go to your employer and tell them hey you need to stop paying me because all this money is going to cost me too much in taxes. Then at the end of the year you'll have a lower W-2, maybe significantly lower. ;) HAPPY FRIDAY!
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Michael Plaks "Now, if your AirBnB unit offers short-term stays, a la hotel, then it is not passive. Then you might be able to generate some losses from that unit, via depreciation and repairs. But we would need to know the details of how you operate the AirBnB. And you can only squeeze some modest savings out of it."
Just to take it one step further, taxpayer will also have to meet the material participation requirements under IRC Sec 469 and related regs to use the loss from a short-term rental with substantial hotel-like services to offset W-2 income.
Rental Property Investor · Honolulu, HI · Member since 2018 · 335 posts · 251 votes
7y
@Michael Plaks I was under the impression that if your LLC owns rental property, and your LLC takes a loss (maintenance, repairs, interest payments, etc), then you can claim that loss against your personal W2. Is that incorrect?
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Daniel Kong The answer, like most regarding taxes, is: "it depends."
It depends on your AGI, the amount of the loss, your level of participation, and the facts and circumstances surrounding your W-2 job and other activities.
Very good question for your tax CPA/EA who understands all of your facts and circumstances.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
7y
Yes, @Brandon Hall, why don't you enlighten us all with some examples of ways to "drastically offset W-2 income" with rentals?? Or other ways to use the passive activities to reduce W-2 income tax footprint?
And @Account Closed, I really wonder if you are looking to save money for your clients or the opposite, ways to increase their taxes.
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
7y
How about hire the tax man Trump hired for the two years represented by the released tax forms? I believe it was determined he would not pay any taxes for quite a few years. :=)
Just so no one thinks I am a hater in this case ... I am not a Trump fan but I do not resent anyone taking legally entitled to write offs. I think anyone who does not, is stupid. I take all the write-offs I am entitled to. I expect others to do the same.
Investor · Gilroy, CA · Member since 2016 · 255 posts · 195 votes
7y
@Stephen Thomas
Not sure this is useful, but check the bottom of this Mad Fientist post. Good luck.
https://www.madfientist.com/tax-benefits-of-real-estate-investing/
@Michael Plaks I was under the impression that if your LLC owns rental property, and your LLC takes a loss (maintenance, repairs, interest payments, etc), then you can claim that loss against your personal W2. Is that incorrect?
LLC does not change anything as far as tax treatment of losses. It will still be a passive loss - which this person cannot benefit from, due to high W2 income.
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Stephen Thomas Contribute to an HSA and establish a Solo 401k. Contribution limits for your Solo 401k. Last I checked it was 55 or 58k to funnel business income. @Justin Windham or @Dmitriy Fomichenko can help with the setup and you can access the funds with a loan feature after you contribute.
Contributions to HSA are limited to $6,900 per year for a family (assuming you have qualified high deductible insurance plan for a family). Solo 401k will not help someone with W2 income, while you are correct that is has a high contribution limit of $55,000 per participant for 2018, only self-employment income can be counted towards contributions into this plan.
Rental Property Investor · Monterey, CA · Member since 2014 · 23 posts · 11 votes
7y
@Stephen Thomas Having a high income from a W-2 makes things difficult. Buying another house will allow you to depreciate ( like someone mentioned) however, depending on just how high that W-2 income (assuming married filing jointly) is you will get phased out of the ability to use those deductions in the current year. You will carry those deductions forword until something in your tax situation changes. Such as, you quit your W-2 job because your investing business is going killer!😁
There are few ways to lower your W-2 but plenty of ways to lower your taxable income. To get into the "drastically lower" area, you must meet certain minimum thresholds which is why I said "it depends."
If your taxable income is in excess of $157,501 if single and $315,000 if married filing joint, then I'd point you to a land conservation easement. You get a Sch A charitable deduction equal to a % of the basis you invested and drastically reduce your tax bill as a result.
For example, if I put $50k into a conservation easement, I'd get roughly a $225k charitable contribution deduction. As long as that deduction amount is less than 50% of my AGI, I can take the full amount of the deduction via Sch A. Assuming I'm in the 35% tax bracket, my $50k contribution yields $78,750 in fed tax savings and also more on the state level depending on the state.
That is one of several ways to drastically lower your tax bill. And it's all 100% legal and legit.
Of course, there are many aspects to a land conservation easement that must be considered prior to pulling the trigger, such as the fact that these are considered listed transactions, but if you're not willing to play ball, then you're stuck with your current tax situation.
There are all the small things that can be done as well such as HSA, 401(k), starting a biz and deducting the costs, etc etc. Often times you can do all of that without having a CPA on your team. We aim to save our clients a significant amount of money.