I make too much money...

Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes

So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

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Daniel DietzPro Member

Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes

You have been getting some great advice here. There is a difference between having some tax free income, and actually reducing your *other* taxes due from W2s, K1s etc....

Meaning this..... say you buy a few rentals and your income is 100K. Deduct interest of 60K, PM of 10K, repairs of 10K, and you are left with 20K of "current cash flow". Now come in the depreciation (a non cash 'cost').... lets call that 40K, so you are sitting at -20K from a tax perspective. *This* is where "not being able to use real estate 'loses' " comes in.

You get to keep that 20K of current cash flow, and use *half* of the depreciation to bring your taxable income down to 0K, but you *dont* get to take the *other* 20K and count a 'lose' against your *other* income. My understanding is that this "suspended lose" *can* be 'carried forward' and used against future passive income or else when you sell to help offset capital gains. So not a total lose at all, just a postponing.

This is just my understanding of how my tax guy explains it to me, I am *not* a tax pro, at ALL ;-)

[email protected]608-524-4899

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Al Pat:
@Ralphie Hernandez declare your wife as an active real estate professional and you can deduct the losses against your income. This is easy but hard part is finding a CPA that guides you well. Check out the video series of Mark J Koehler on YouTube and you got all your answers as he is CPA and attorney.

You can't just "Declare" this.
She ACTUALLY has to spend over 750 hours on the real estate, and no more time than that on any other combined activities.
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
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Jason Dobbins
Rental Property Investor · Wilton, NH · Member since 2019 · 57 posts · 32 votes
6y
@Ralphie Hernandez did your cpa give you a list of tax free investments? Guessing his suggestion would be hide cash under your mattress. Real estate is an investment treat it like one
1 Reply
Jesse Daconta
Rental Property Investor · Newport News, VA · Member since 2018 · 264 posts · 130 votes
6y
You need someone to be labeled as a real estate professional (you're probably not eligible because you have a full-time job). Once you do this you can use the tax benefits from your passive income real estate to also roll over into your earned income through depreciation, etc.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
6y
@Ralphie Hernandez

The fact that you make too much money does not mean that you can't take advantage of the benefits of real estate investing.

The number one tax benefit of real estate investing is depreciation which allows you to offset the cash-flow with a portion of the purchase price.
You don't get depreciation in other investment types like interest income or dividend income.

Some taxpayers in the US can be at a marginal 50% federal/state income tax bracket. The cash flow(if any) from your rental investments won't be taxed(potentially) because of depreciation.

There is a bunch more.
[email protected]917-280-8544
Basit Siddiqi CPA4.979 Reviews
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Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@TJ Watson Thanks for all that information TJ very helpful. I am a true beginner investing in rental properties. reality is I really didn’t expect much from talking to my CPA as we just had a short conversation (Team building). He has been doing my taxes for over 15 years so he knows how much money I make. he just wanted to let me know that I won’t qualify for some tax breaks.. I don’t plan to buy a bunch of bad properties and loose money. As a new investor I need to know every advantage that I have that makes me money and if one of those advantages are taken away it’s good to know.
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Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Al Pat Thank you great info. Going to check it out.
0 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Basit Siddiqi. Thank you good info
0 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Jason Dobbins. LoL... good one Jason
0 Reply
Jason Dobbins
Rental Property Investor · Wilton, NH · Member since 2019 · 57 posts · 32 votes
6y
@Ralphie Hernandez on a serious note I don't get to write off my losses against my other business earnings either but I still get to record the losses which should keepy rental income negative for years meaning my profit after expenses is tax free. That is enough reason for me.
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Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Jason Dobbins definitely good info Jason thank you. Tax break or not is not going to make me not invest in real estate, just want to know every advantage or disadvantage of this business.
1 Reply
Tal Perry
Flipper/Rehabber · Miami, FL · Member since 2019 · 29 posts · 14 votes
6y
@Ralphie Hernandez i recommend you check out the YouTube channel "nomad capitalist" alot of helpful tax saving strategy and information for long term planning
1 Reply
Matthew Ringer
Portland, OR / SW Florida · Member since 2017 · 41 posts · 32 votes
6y
@Ralphie Hernandez
Daniel Dietz nails it as far as my thinking, but I’ll add one more thing. Let’s say at the end of the year you’re sitting at a $20k profit (as opposed to a loss on paper of $20k). So you pay tax on the $20k of $8k and are left with $12k. That’s still $12k more than you made last year.
0 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
6y
Get a new CPA. One who has rich clients who invest in real estate and almost never pay tax on it...or defer the tax for years (or even decades).
1 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Mike Dymski:
Get a new CPA. One who has rich clients who invest in real estate and almost never pay tax on it...or defer the tax for years (or even decades).

No CPA can remove taxes on W2 income for a client, rich or otherwise, who has a high-paying full-time W2 job. Unless such client has a spouse who is a full-time Realtor or investor, and they have a sizeable RE portfolio. Otherwise, high W2 income has very few possible offsets, like some oil&gas investments, conservation easements and a handful of other unconventional and risky options.
When we read about wealthy people paying zero taxes - these people are not W2 employees!
Let's stop confusing taxes on real estate investments with taxes on high W2 income. The former can be tax-free. The latter cannot, save for the limited 401k contributions.

4 Reply
Reginald Ross
Rental Property Investor · Gulf Shores, AL · Member since 2019 · 107 posts · 115 votes
6y
@Ralphie Hernandez
I had this same problem at first but found come creative yet legitimate ways around it.
Other than the obvious, “find a good cash flowing deal with high ROE”, here are a few things that have helped me...
First, assuming you have your properties under an LLC, you should talk to your CPA about "material participation". It changes the nature of the income from passive to active.
There are some rules the IRS has in place to qualify but basically, if you spend > 500 hours per year on real estate related activities, you can most likely take advantage. I don’t mess around and keep a log of my hours every week in case I’m ever audited. This one change helped immensely.
The next strategy I’ve employed was cost segregation which is just a fancy accounting trick for accelerating depreciation by segregating asset schedules. It increases cash flow and rate of return by front loading depreciation in the first couple of years of owning the asset.
This year, it meant the difference between owing $50k in taxes to getting back ~$25k. My CPA charged $4400 for a cost segregation analysis on 22 of my properties and $450 to generate the tax projection. The money I spent was well worth it. I plan on doing one every year that I purchase assets.
A 1031 can help delay some taxes but I usually find they are close to break even when you consider the time and money invested.
Also, if you keep a property in your back pocket that you can show a loss on sale with, you can sell it to offset your other taxable income.
Hope this helps!
1 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
6y
Originally posted by @Michael Plaks:
Originally posted by @Mike Dymski:
Get a new CPA. One who has rich clients who invest in real estate and almost never pay tax on it...or defer the tax for years (or even decades).

No CPA can remove taxes on W2 income for a client, rich or otherwise, who has a high-paying full-time W2 job. Unless such client has a spouse who is a full-time Realtor or investor, and they have a sizeable RE portfolio. Otherwise, high W2 income has very few possible offsets, like some oil&gas investments, conservation easements and a handful of other unconventional and risky options.
When we read about wealthy people paying zero taxes - these people are not W2 employees!
Let's stop confusing taxes on real estate investments with taxes on high W2 income. The former can be tax-free. The latter cannot, save for the limited 401k contributions.

My post was not about W-2 income. There are lots of tax benefits aside from that one.
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Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Reginald Ross Thank you great info.
0 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Mike Dymski:

Your post was on the thread that started with this statement by the OP:

So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

And you responded - "Get a new CPA"

So I took an exception to your post, Mike, because his CPA is not the problem.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
6y
@Michael Plaks If his CPA is advising him that he will not qualify for tax breaks on his rentals because he makes too much money, that's a problem. Not trying to offend anyone. Just trying to help the OP select a CPA that is a good fit.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Mike Dymski:
@Michael Plaks If his CPA is advising him that he will not qualify for tax breaks on his rentals because he makes too much money, that's a problem. Not trying to offend anyone. Just trying to help the OP select a CPA that is a good fit.

It's semantics, Mike. You're using "tax breaks" in a wider sense, being an advanced investor. Most beginners, like the OP, interpret the words "tax breaks" much more narrow: reducing their current tax bill. In this narrow sense, a high-W2 person will NOT see "tax breaks", his taxes will be the same before and after rentals.
I'm sure this is what his CPA meant, and his CPA was correct in this regard. Making the OP believe that he somehow has a bad CPA is a disservice.
1 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
6y
@Michael Plaks okay, I got it. I see the OP's follow up post now and it seems to confirm that interpretation and the need for more dialogue. No need to switch to Plaks yet...
2 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
6y
Originally posted by @Ralphie Hernandez:
So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

What your CPA is most likely referring to is the passive losses and how they cannot be used to offset your W-2 income. If you make less than 100k, you will be allowed to deduct up to 25k of passive losses against your ordinary income. If you make more than 100k, this deduction is phased out for every dollar you earn over 100k.

With all due respect to all the other good posters who have offered suggestions with the best of intentions, the only folks who appear to understand what the OP's CPA was referring to are @Natalie Kolodij and @Michael Plaks.

With that said, generally speaking, significant passive losses are generated more from syndicated investments and less from directly owned real estate. But even if you do generate significant passive losses with your rentals, you'll be able to carry them forward to subsequent years until you, as Michael Plaks mentioned, sell your properties or offset them against passive income.
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Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Tony Kim. Great information tony thank you very much...
0 Reply
Aaron Hunt
All Over, USA · Member since 2017 · 689 posts · 756 votes
6y
Originally posted by @Ralphie Hernandez:
So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

I was running my numbers and I realized the same thing. I’m in a higher income tax bracket as well 32%+. Zero benefit right now with our 4 properties.

Between the mortgage interest (front-loaded when leveraged), and the maintenance/turnover expenses, we’re coming up well short on some of the units.
Ultimately determined it’s just suspended until we decide to sell. There’s a good chance we’ll sell one or two off this year.
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Timothy Hero
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
If the wealthiest people in the world can find the tax loopholes and your CPA is stating you make too much to do the same, you might want to search for a new CPA.

There should be no hard feelings between you and your CPA. However, at the end of the day, it's business, and you need to save money when growing a business.
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