Good tax write offs for high income?
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votesI have not met you, Sean, so in case you're easily triggered, please do not read the rest of my response. :) Same soft request to everybody else. And now I rant.
There is NO such thing as good tax write-offs for high income. Countless books, blogs, webinars etc claim that these write-offs exist, they are just "hidden" so you need to buy their "Tax Goldmine" books and courses and hire the authors. It is one big pile of... hype. So again, in case you were busy looking at memes when I said it the first time: there is NO such thing as good tax write-offs for high income if we're talking about high W2 income. High self-employment income is a different game.
Here is what Grant Cardone and all the other wealth preachers do not explain when they mislead you and everybody else. Apology for my condescending tone, it is for the sake of clarity.
1. Write-offs are not free. If you run a regular side business selling goods or services, including wholesaling, development, house flipping or being a Realtor, you can only write off what you spend. You pay money first, and then you have a matching write-off. The point of being in business is to make money, so your business income should be more than your business expenses. And that pushes your taxes higher, not lower.
If your business has more expenses than income, then yes, you do have a tax loss against your W2 income. But it means that you are losing real money in the process! Why this remarkably simple concept eludes so many people is beyond me.
2. The myth of writing off your life. I know the answer to my previous why. You've been told that you can write off your life: your truck, your clothes, your groceries, your house bills, your vacation and your kids allowance. Just need to learn the "secrets of the wealthy." Well, there is a grain of truth in it. You can write off expenses of driving your truck for business, but it is because you - again! - have to spend your money for gas and maintenance. It does cost you more to use your truck for business, so you write it off.
The rest - not so much. You can hire your kids, but they actually have to do real work for you. You can plan your vacations around business conventions and other legitimate business needs, but you will have to spend significant time attending to business during your vacation, and this can cost you your marriage. And do you really want to limit your travel this way?
You can never write off your clothes except for logo-ed uniforms. You cannot write off your groceries other than for a business meeting you host at home. And taking your wife out for your anniversary is not deductible, either. Your dog is your "security system", so it is not dog food, it is business supplies. Sure.
3. But rentals! Depreciation! Cost segregation! Yes, rentals are a sweet exception to that #1 rule above. You can have actual cash flow from the rental properties, and then you can write off depreciation, resulting in a paper loss. Yes, it is true: higher income and no higher taxes. But no lower, either! Oh bother, as Winnie the Pooh would say.
This is because at your $200k level of income you cannot claim any losses from rentals. It does not matter how big they are. You can double them by finding all the minor write-offs I mentioned in #2 above, you can quadruple them with cost segregation. And you still cannot take any of these losses against your W2 income. None. These losses are not wasted, you will be able to catch up when you sell your properties, but not before that. Kinda takes fun out of finding those misc deductions and loopholes.
4. But real estate professionals! Gotta love it when people recommend that you "become a real estate professional." You can become an MBA if you go to business school. You can become a father, I assume you know how. You cannot "become" a real estate professional. This is a tax classification that you must qualify for. If you do - then indeed you open up a huge opportunity for tax savings.
Unfortunately, you cannot qualify while holding a normal 40-hr/week W2 job. This is because the tax law requires you to spend more time every week doing real estate than doing your job. So, you will need 81-hr work weeks, year-round. 40 hours at your job plus another 41 hours in real estate.
Your wife may qualify as a RE Pro if she does not have a regular 40-hr job and spends a lot of time in real estate, minimum 750 hours per year. If she qualifies, then you can catch a piggyback ride. Marry wisely.
5. But retirement plans! Well, I assume you max out on your 401k already. Holding rentals does not create additional opportunities for funding retirement plans, without serious jumping thru hoops. You have a small opportunity to fund Roth IRAs, but it does not reduce your annual tax burden. That's about it.
6. Tax strategists. Sure, we can do a lot of good tax planning for you. Still, we cannot turn water into wine and cannot eliminate taxes on your W2 income.
By the way, one of my peers who responded to your post happens to be your semi-neighbor (Charlotte), and she is one of us who will not drown you in hype. Give her a call: @Natalie Kolodij
28 Replies
- 6yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesThe best and biggest write-offs come from becoming a Real Estate Professional, as defined by the IRS, combined with accelerated depreciation, particularly bonus depreciation.
- Member since 2020 · 6 posts · 2 votes6y
I agree with @Greg Scott. If you become a RE Pro and use online cost segs such as KPMG's for 100k+ value prop and/or legit cost segs for 1m+ props, you can reep massive benefits.
I have many clients who own one entity to buy and hold (rent out residential properties) and one entity for property management. Remember, the buy and hold entity (LLC) is passive income and would not be subject to SE tax, but the property management company would. You would get a deduction in the passive entity (reduce passive income), and pick up income in a LLC or S-Corp that would be non-passive income (potentially subject to SE tax). I'd need to know more about what you envision your property management company doing and/or paying for, but there's definitely many pros and cons you'd need to think through regarding tax and non-tax items.
Matthew Talmadge
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes6y
If you make over $200k a year and you have rentals- generating huge write offs won't reduce your income.
Your passive losses will be disallowed- so you'll be generating big losses each year that carry forward and aren't allowed to offset your w2 earnings.
They'll offset other passive income, or be released when you sell the property.
Also worth nothing that managing your own properties means you're shifting passive income not subject to SE tax to active income subject to SE tax. So you'll want to be cautious with this because you can potentially pay more tax for charging yourself.
- 6ySean H.Developer · NC · Member since 2019 · 211 posts · 112 votesOP
Originally posted by @Greg Scott:
The best and biggest write-offs come from becoming a Real Estate Professional, as defined by the IRS, combined with accelerated depreciation, particularly bonus depreciation.I always thought bonus depreciation was a double edge sword. Yes, you get high depreciation write offs, but the lowers the time period you can write off the rental, so its only worth holding for five years. But what happens when you sell, you have to pay on all that depreciation recapture? Unless...you decide to do a full gut remodel right before you sell, which would effectively wipe the slate clean of a lot of depreciation recapture.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
Here's how you generate a huge write off: You pay your CPA a ton of money each year. It's deductible for you and revenue for them. : )
On a serious note, rarely does it make sense to spend $1 in order to get back $0.50, both in tax world and in the business world.
Generally businesses look at the ROI associated with each cost. As in, how much revenue will this investment produce over its life-cycle. You seem focused only on the tax side, without regard to how much revenue the big-ticket expenditure is going to bring in. Not a recipe for success IMO.
There's various strategy that can be employed to defer tax while preserving net worth. Self-employed retirement accounts, proper tax entity structuring, etc.
You should be careful with "cool purchases". If there's a material element of personal use your deduction may be limited, or even disallowed.
This is a good conversation to have with your CPA, who knows your facts, circumstances, and goals.
- Member since 2020 · 4 posts · 5 votes6y
@Sean H.
I assume you can still sell under a 1031 after a bonus depreciation...
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Eamonn McElroy:
Here's how you generate a huge write off: You pay your CPA a ton of money each year. It's deductible for you and revenue for them. : )
This is BiggerPockets, sir. We're looking for investor-friendly CPAs. Before the next sunrise, couple regulars who I won't tag will jump in bragging how their CPA charges them $500 for 10 properties in 5 states and provides unlimited support. Not such a huge write-off, sadly. :)
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
I have not met you, Sean, so in case you're easily triggered, please do not read the rest of my response. :) Same soft request to everybody else. And now I rant.
There is NO such thing as good tax write-offs for high income. Countless books, blogs, webinars etc claim that these write-offs exist, they are just "hidden" so you need to buy their "Tax Goldmine" books and courses and hire the authors. It is one big pile of... hype. So again, in case you were busy looking at memes when I said it the first time: there is NO such thing as good tax write-offs for high income if we're talking about high W2 income. High self-employment income is a different game.
Here is what Grant Cardone and all the other wealth preachers do not explain when they mislead you and everybody else. Apology for my condescending tone, it is for the sake of clarity.1. Write-offs are not free. If you run a regular side business selling goods or services, including wholesaling, development, house flipping or being a Realtor, you can only write off what you spend. You pay money first, and then you have a matching write-off. The point of being in business is to make money, so your business income should be more than your business expenses. And that pushes your taxes higher, not lower.
If your business has more expenses than income, then yes, you do have a tax loss against your W2 income. But it means that you are losing real money in the process! Why this remarkably simple concept eludes so many people is beyond me.
2. The myth of writing off your life. I know the answer to my previous why. You've been told that you can write off your life: your truck, your clothes, your groceries, your house bills, your vacation and your kids allowance. Just need to learn the "secrets of the wealthy." Well, there is a grain of truth in it. You can write off expenses of driving your truck for business, but it is because you - again! - have to spend your money for gas and maintenance. It does cost you more to use your truck for business, so you write it off.
The rest - not so much. You can hire your kids, but they actually have to do real work for you. You can plan your vacations around business conventions and other legitimate business needs, but you will have to spend significant time attending to business during your vacation, and this can cost you your marriage. And do you really want to limit your travel this way?
You can never write off your clothes except for logo-ed uniforms. You cannot write off your groceries other than for a business meeting you host at home. And taking your wife out for your anniversary is not deductible, either. Your dog is your "security system", so it is not dog food, it is business supplies. Sure.
3. But rentals! Depreciation! Cost segregation! Yes, rentals are a sweet exception to that #1 rule above. You can have actual cash flow from the rental properties, and then you can write off depreciation, resulting in a paper loss. Yes, it is true: higher income and no higher taxes. But no lower, either! Oh bother, as Winnie the Pooh would say.
This is because at your $200k level of income you cannot claim any losses from rentals. It does not matter how big they are. You can double them by finding all the minor write-offs I mentioned in #2 above, you can quadruple them with cost segregation. And you still cannot take any of these losses against your W2 income. None. These losses are not wasted, you will be able to catch up when you sell your properties, but not before that. Kinda takes fun out of finding those misc deductions and loopholes.
4. But real estate professionals! Gotta love it when people recommend that you "become a real estate professional." You can become an MBA if you go to business school. You can become a father, I assume you know how. You cannot "become" a real estate professional. This is a tax classification that you must qualify for. If you do - then indeed you open up a huge opportunity for tax savings.
Unfortunately, you cannot qualify while holding a normal 40-hr/week W2 job. This is because the tax law requires you to spend more time every week doing real estate than doing your job. So, you will need 81-hr work weeks, year-round. 40 hours at your job plus another 41 hours in real estate.
Your wife may qualify as a RE Pro if she does not have a regular 40-hr job and spends a lot of time in real estate, minimum 750 hours per year. If she qualifies, then you can catch a piggyback ride. Marry wisely.
5. But retirement plans! Well, I assume you max out on your 401k already. Holding rentals does not create additional opportunities for funding retirement plans, without serious jumping thru hoops. You have a small opportunity to fund Roth IRAs, but it does not reduce your annual tax burden. That's about it.
6. Tax strategists. Sure, we can do a lot of good tax planning for you. Still, we cannot turn water into wine and cannot eliminate taxes on your W2 income.
By the way, one of my peers who responded to your post happens to be your semi-neighbor (Charlotte), and she is one of us who will not drown you in hype. Give her a call: @Natalie Kolodij
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Michael Duguet:
I assume you can still sell under a 1031 after a bonus depreciation...
Yours is a partially correct assumption.
Partially, because the rules for exchanges have changed with the tax reform. You can only exchange real estate now. For example, carpets and appliances that you cost segregated and bonus-depreciated are not real estate and cannot be part of an exchange. So it gets tricky with cost seg and bonus depreciation involved.
Otherwise, the general idea is valid.
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Sean H.:
I'm sure there's other cool purchases that have high enough write offs to justify the purchase
Which is why Black Friday exists. So we can buy more cool stuff that we don't really need. Because it's on sale!!!
Tax write-off is exactly the same: a discount on purchase. You buy something for $1,000 and write it off on taxes. Say your Fed+Self-Employment+state combined tax rate is 45%. So you paid $1,000 and got a $450 rebate in the form of tax savings.
In other words, you bought it at 45% off discount.
If you need to justify your purchases by having a discount on them - break up with your gf. Then you will no longer need to justify anything. Be free.
- Realtor · Phoenix, AZ · Member since 2020 · 20 posts · 13 votes6y
@Sean H.
I just learned that If you buy a new or pre-owned “heavy” (6,000 lbs curb weight) SUV, pickup, or van and put it to use in your business, you are potentially eligible for 100% first-year bonus depreciation. There are some cavities
- That’s one of the more “huge” deductions I’ve heard of. But, having use for a vehicle that heavy is the kicker.
- Investor · NC · Member since 2020 · 12 posts · 1 vote6y
Originally posted by @Sean H.:
yes, shifting passive to active is a good point!
But, it sounds like everyone misread my post. I'm sure there's other cool purchases that have high enough write offs to justify the purchase
Bigger investors buy boats, the small-mid sized Trucks, Suburbans and then sell them to family cheap after a few years.
- Rental Property Investor · Oakland, CA · Member since 2020 · 4 posts · 0 votes6y
@Sean H. I recommend you read:
-The Tax and Legal Playbook by Mark J Kohler
It has amazing tax write offs for small business. Even has some great real estate write offs!
- 6ySean H.Developer · NC · Member since 2019 · 211 posts · 112 votesOP
How could you justify a boat to the government?
Originally posted by @David R smith:Originally posted by @Sean H.:
yes, shifting passive to active is a good point!
But, it sounds like everyone misread my post. I'm sure there's other cool purchases that have high enough write offs to justify the purchase
Bigger investors buy boats, the small-mid sized Trucks, Suburbans and then sell them to family cheap after a few years.
- 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Sean H.:
Also, most people i guess assumed i was w2. All my income comes from the sale of flips and builds. I pay myself a reasonable amount of schedule c income out of the profits, since i do most of the work myself.
Well, we had to assume because it was not explained. :)
If you make $200k from flips/builds, you need more than write-offs. You need a tax strategy. "Pay myself a reasonable amount of schedule c income" is not a strategy and is plain incorrect.
PS. Boats for investors is a scam, you're right to be suspicious. Not deductible, save for some very unique circumstances.
- 6ySean H.Developer · NC · Member since 2019 · 211 posts · 112 votesOP
Its not incorrect, if i'm doing most of the work. If buy a house for 100k, put 100k into it and sell it for 300k. I might allocate 50k of that 100k in to my business income, because im actually doing 50k in work. Once the 50k is in the "business" section, i can make mileage write offs, section 179, and get my nice 20% deductible.
I also contribute the maximal amount to my sep 401k to help ease the accumulation of my profits for the year. Since you can contribute as an employer and employee, i think that was around 50k for me last year.
Beyond that, i'm paying taxes on the rest.
I haven't messed around with rentals, because unless the government won't red flag me for writing off a consistent loss on my income with bonus depreciation it isn't worth my time. I make more money on my invested cash flipping houses. - 6yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Originally posted by @Sean H.:
Its not incorrect,
It is incorrect. You do not pay yourself from Sch C. The reasonable compensation strategy is done via S-corporation/W-2 setup.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
I just learned that If you buy a new or pre-owned “heavy” (6,000 lbs curb weight) SUV, pickup, or van and put it to use in your business, you are potentially eligible for 100% first-year bonus depreciation. There are some cavities
Really? Is that because it's a sweet deal? : )
- Investor · Marietta, GA · Member since 2015 · 382 posts · 258 votes6y
@Michael Plaks
That is a lucid, intelligent, well-thought out response.
Well stated sir!
- Member since 2022 · 119 posts · 52 votes3y
Quote from @Michael Plaks:
I have not met you, Sean, so in case you're easily triggered, please do not read the rest of my response. :) Same soft request to everybody else. And now I rant.
There is NO such thing as good tax write-offs for high income. Countless books, blogs, webinars etc claim that these write-offs exist, they are just "hidden" so you need to buy their "Tax Goldmine" books and courses and hire the authors. It is one big pile of... hype. So again, in case you were busy looking at memes when I said it the first time: there is NO such thing as good tax write-offs for high income if we're talking about high W2 income. High self-employment income is a different game.
Here is what Grant Cardone and all the other wealth preachers do not explain when they mislead you and everybody else. Apology for my condescending tone, it is for the sake of clarity.1. Write-offs are not free. If you run a regular side business selling goods or services, including wholesaling, development, house flipping or being a Realtor, you can only write off what you spend. You pay money first, and then you have a matching write-off. The point of being in business is to make money, so your business income should be more than your business expenses. And that pushes your taxes higher, not lower.
If your business has more expenses than income, then yes, you do have a tax loss against your W2 income. But it means that you are losing real money in the process! Why this remarkably simple concept eludes so many people is beyond me.
2. The myth of writing off your life. I know the answer to my previous why. You've been told that you can write off your life: your truck, your clothes, your groceries, your house bills, your vacation and your kids allowance. Just need to learn the "secrets of the wealthy." Well, there is a grain of truth in it. You can write off expenses of driving your truck for business, but it is because you - again! - have to spend your money for gas and maintenance. It does cost you more to use your truck for business, so you write it off.
The rest - not so much. You can hire your kids, but they actually have to do real work for you. You can plan your vacations around business conventions and other legitimate business needs, but you will have to spend significant time attending to business during your vacation, and this can cost you your marriage. And do you really want to limit your travel this way?
You can never write off your clothes except for logo-ed uniforms. You cannot write off your groceries other than for a business meeting you host at home. And taking your wife out for your anniversary is not deductible, either. Your dog is your "security system", so it is not dog food, it is business supplies. Sure.
3. But rentals! Depreciation! Cost segregation! Yes, rentals are a sweet exception to that #1 rule above. You can have actual cash flow from the rental properties, and then you can write off depreciation, resulting in a paper loss. Yes, it is true: higher income and no higher taxes. But no lower, either! Oh bother, as Winnie the Pooh would say.
This is because at your $200k level of income you cannot claim any losses from rentals. It does not matter how big they are. You can double them by finding all the minor write-offs I mentioned in #2 above, you can quadruple them with cost segregation. And you still cannot take any of these losses against your W2 income. None. These losses are not wasted, you will be able to catch up when you sell your properties, but not before that. Kinda takes fun out of finding those misc deductions and loopholes.
4. But real estate professionals! Gotta love it when people recommend that you "become a real estate professional." You can become an MBA if you go to business school. You can become a father, I assume you know how. You cannot "become" a real estate professional. This is a tax classification that you must qualify for. If you do - then indeed you open up a huge opportunity for tax savings.
Unfortunately, you cannot qualify while holding a normal 40-hr/week W2 job. This is because the tax law requires you to spend more time every week doing real estate than doing your job. So, you will need 81-hr work weeks, year-round. 40 hours at your job plus another 41 hours in real estate.
Your wife may qualify as a RE Pro if she does not have a regular 40-hr job and spends a lot of time in real estate, minimum 750 hours per year. If she qualifies, then you can catch a piggyback ride. Marry wisely.
5. But retirement plans! Well, I assume you max out on your 401k already. Holding rentals does not create additional opportunities for funding retirement plans, without serious jumping thru hoops. You have a small opportunity to fund Roth IRAs, but it does not reduce your annual tax burden. That's about it.
6. Tax strategists. Sure, we can do a lot of good tax planning for you. Still, we cannot turn water into wine and cannot eliminate taxes on your W2 income.
By the way, one of my peers who responded to your post happens to be your semi-neighbor (Charlotte), and she is one of us who will not drown you in hype. Give her a call: @Natalie Kolodij
Thanks so much - super helpful. Can high income earners still do writeoffs with short term rentals?
- 3yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Amby Bhagtani:
Yes, as long as they satisfy "material participation" test. https://www.biggerpockets.com/...
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