Tax strategies when you start making a bit more...

13 Replies

Howdy everyone. Hope you are all doing great!

So, this year, I will make around $140k on paper.  I make right over $70k at my day job (with... no benefits, yes I know, moot point) and my rentals will pull in right around that much as well. I take no pay from my rental business yet. Just putting everything back into it to pay for some repairs/upgrades and also build capital back up so I can invest more.

I don't have a 401k through work... so I can still contribute to Traditional IRA for this year, correct? And still get deductions because of no 401k? The owner of the restaurants I manage is considering starting a 401k in 2020. So at that point, if he does, I won't be able to get a deduction from Traditional IRA, making it not a tax advantaged retirement account for me to contribute to anymore. What is the best move at that point? Do I go with ROTH? Do I just start investing in index funds and what not, just not utilizing retirement accounts for that piece? I will, of course, max out my 401k if I can and hope to have a little left after for extra investments. Just curious what makes the most sense at this point. We are finally able to start really putting money away and I want to make sure we do it in the way that will help us the most as we move forward.

Thank you all so much!

@Brian H.

Some of the questions you're asking are heavily dependent on your facts, circumstances and goals and should be directed to your CPA and/or financial advisor.

You didn't state whether or not you're married or single or your age... If you're single, under age 50 and not covered by a retirement plan at work you can contribute and deduct up to $6,000 in 2019 for a Traditional IRA.

Agreed- this requires actual tax planning based on all your facts and circumstances- I'd find a tax pro who specializes in REI.

Worth noting- you said you rentals make about $70k but you're not paying yourself from them putting it back into them, ect 

Whether you take money out doesn't impact your taxable income- you're taxed on how much the net profit/loss of the rentals geneates- whether you take that profit or leave it in the bank. 


Also- a lot of rentals generate losses on paper, and if you're putting money back in for repairs regularly there's a good chance some of those need to be capitalized as well. 

I guess in short- if you're not already working with a REI savvy tax pro there's a chance things aren't correct, aren't being done as advantageously as possible, and you won't be in a the best place tax wise.

Originally posted by @Brian H. :

Howdy everyone. Hope you are all doing great!

So, this year, I will make around $140k on paper.  I make right over $70k at my day job (with... no benefits, yes I know, moot point) and my rentals will pull in right around that much as well. I take no pay from my rental business yet. Just putting everything back into it to pay for some repairs/upgrades and also build capital back up so I can invest more.

I don't have a 401k through work... so I can still contribute to Traditional IRA for this year, correct? And still get deductions because of no 401k? The owner of the restaurants I manage is considering starting a 401k in 2020. So at that point, if he does, I won't be able to get a deduction from Traditional IRA, making it not a tax advantaged retirement account for me to contribute to anymore. What is the best move at that point? Do I go with ROTH? Do I just start investing in index funds and what not, just not utilizing retirement accounts for that piece? I will, of course, max out my 401k if I can and hope to have a little left after for extra investments. Just curious what makes the most sense at this point. We are finally able to start really putting money away and I want to make sure we do it in the way that will help us the most as we move forward.

Thank you all so much!

 @natalie K said.  I see a need for a tax professional in your future. (Probably me soon as well)   Once I hit 20 properties.

As far as the 401k and traditional IRA. One is not dependent on the other. Total Income is what allows you to contribute to a traditional IRA regardless if you contribute to a 401k.

@Natalie Kolodij

I had been thinking about this recently. Concerned my CPA, while knowledgable, may not have the specific REI knowledge I need to really make sure I am set at tax time. Is it reasonable to just give my 2018 tax return to an REI-focused CPA and pay them to just comb through it and see if it looks good or if they would have done things differently? Can I expect an unbiased answer since they know I have a CPA that I would likely stay with if it turns out they know all the little extra bits that help us out in REI?

@Brian H.

That service would probably fall under consulting for a REI CPA/EA. This may happen if you are trying to get a fresh look at how your existing tax return have been prepared, and if everything available that is tax advantageous is being taken by your current Tax preparer.

Every CPA/EA works differently, as many tax professionals on these forums will recommend, talk to a few different REI specialists on here and see who you think might have the best personal/professional fit to perform the services needed.

To answer your questions:

1) Is it reasonable to just give my 2018 tax return to an REI-focused CPA and pay them to just comb through it and see if it looks good or if they would have done things differently?

Yes

2) Can I expect an unbiased answer since they know I have a CPA that I would likely stay with if it turns out they know all the little extra bits that help us out in REI?

Generally yes. As you will be paying for the review service to determine whether there is any additional value add, you most likely will get an unbiased answer.

@Brian H.

I would absolutely reach out to a few of the established Tax pros here on BP. I worked for high end CPA firms for years and unfortunately while we said we were experienced with real estate clients- it was very surface level. Finding a Tax pro on here who owns their firm likely means you're finding someone who is both REI specialized and also an investor. Puts a little skin in the game- they GET what you're trying to do with REI.


As mentioned everyone operates differently. I do a free initial consultation that includes Prior year review- I know some firms that do charge. Feel free to reach out if you'd like some recommendations on who I would recommend. 

I would definitely like to hear some people's recommendations in regards to REI-focused tax pros here on BP.

Thanks for the shout out Natalie.

If @Brian H. is located in the Carolinas I would reach out to @Natalie Kolodij first; she's local to you.

Keep in mind that most CPAs and EAs are firmly ensconced in their fall "busy season" dealing with 9/15 and 10/15 statutory deadlines.  So...if it's not a tax return that needs to be filed on or before 10/15 it may be wiser to reach out and interview tax pros post 10/15.

@Brian H.

I suspect you might have a misunderstanding about taxes. Are you generating $70k in rents? If so, then you're not making $140k.

What counts as your income is NET income, or rent minus all expenses: mortgage interest, property taxes, insurance, maintenance, repairs, depreciation and more. 

You may actually have a tax loss in this case, making your annual income $70k from W2 minus losses from rentals.

@Brian H.

You are on the right path asking the question-Start using tax deferred and tax free accounts. I think it is the easiest and best way to cut taxes. Make sure your money is working as hard for you as you worked for the money. The more you make the more you pay in USA. You must educate yourself about taxes and interest.  

Many people are moving to Puerto Rico because of the the tax advantages. Get with a couple of CPAs and tax attorneys and get a plan. There are a lot of strategies to employ. Marital deduction, having kids/dependents are examples of not so good ideas-IMO. Others include using life insurance, conservation easements, retirement accounts, education accounts, health savings accounts, long term capital gains, passive vs earned income, tax credits, off shore investing, home interest deduction, depreciation on real estate, business expenses, etc too mention a few. 

@Brian H.

You can contribute to a traditional IRA no matter what your income is.

If you have access to a qualified retirement plan at work the deductibility of your traditional IRA contributions are based on your income.

If your Modified Adjusted Gross income is $64,000 (103,000 for married) or less you can take the full deduction. If your income is between $64,000 and $74,000 ($103,000 to $123,000 for married) then you can take a partial deduction. If your income is $74,000 or more ($123,000 for married) your contributions are not eligible for a deduction.

As others have pointed out, there's not much planning that can be done without knowing more details of your situation. Since income taxes are lower than they have been in decades I would question whether you want to defer taxes. With your income it may make more sense to use a Roth IRA instead of traditional anyway and that is not limited by your 401(k).

Also, its not always the best to be maxing out your 401(k)…some plans aren’t that great and can have high fees and poor investment choices. Usually contributing enough to get any matching funds is great, but going above that doesn’t always make sense. I would recommend sitting down with a CFP that does long term tax planning as opposed to just looking at how to pay less in taxes in the next year.

It would definitely be worth having a conversation with a CPA/tax professional about your situation and let them see the details. Based on a number of personal details and what your rentals look like, it may be quite beneficial. (Assuming you are single) - With no retirement plan at work you can contribute and deduct $6000 to an IRA, depending on your health insurance you may also be able to utilize an HSA for another $3500. There could be other things that are not optimized for your rental properties.

One thing I will note if you end up looking locally for a professional, is don't get hung up by looking for someone advertising themselves specifically as a real estate CPA. Any professional with a high volume of business returns should be able to provide great value. I say this as anyone who does a high volume of business returns has high exposure to real estate issues. This can be found in sole proprietors or up through regional firms. Beyond regional firms you will likely not get a good bang for your buck on the fees. 

A large number of tax professionals are always willing to take 15-30 minutes to review someone's return at no charge and let the potential client know what their issues are, I know this is how I operate when talking with new clients. CPAs have hourly rates that are up there, and any of them worth their salt will want to be sure that they can provide value and show you that they'll be worth their fees.