$2,000,000 Tax Burden at age 26! Please help!

Member since 2019 · 15k+ posts · 11k+ votes

If those numbers are correct, I would talk to your CPA rather than asking strangers on the internet who don't have all of the information.

27 Reply

Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

5y

"I’ve been trying to develop a game plan before going to my CPA & financial advisor next week"

It is their job, isn't it?

16 Reply

Christopher Smith

Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes

5y

I'd be very careful attempting to offset gains with contrived tax deductions or highly engineered tax loss transactions. They have a tendency to stand out like a sore thumb which means they will be challenged and tax, interest and penalties can be huge if they are not determined to be lawful.

I've seen many cases where folks have sold a business and as a result have a huge one time gain and thus shopped the National law and accounting firms for tax strategies to find an offset only to be utterly destroyed on audit.

You might research the BOSS, SON of BOSS tax, etc., tax avoidance transactions where people with gains in the hundreds of millions range fabricated offsetting loses and got absolutely crushed (and this was with supporting tax opinions in hand and top flight tax people defending them at great expense).

2 Reply

Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

5y

Originally posted by @Parth Patel:

Hi all,

I’m currently in a situation where I’ve got a Tax Burden of approximately $2 million.

I need to reduce this with real estate investments before the end of the year. What can I do?

I’ve been trying to develop a game plan before going to my CPA & financial advisor next week. I have family who is significantly involved in real estate, but I’d like to get some other points of view before diving in.

I had an idea where I could bid on foreclosed homes and then rehab significantly to trim away from my massive tax burden. Is this a viable option?

I’ve always wanted to invest in real estate but have absolutely no experience in it.

What are your thoughts? What would you do if you were in a similar situation?

Some important information:

I’ve got $3,500,000 in cash.

I’ve set aside $2,000,000 for my estimated tax burden. I’ve calculated the tax correctly.

I’m 26 years old

I have $0 debt

I have no financial obligations at all.

Thank you!

Partha,

It’s virtually impossible to just tell you how we can help without having more detail on your finances.

With that kind of sum, I would definitely talk to the GOOD tax advisors. Not just one, multiple.

Do I think is there a way? absolutely yes. Do I think it will come with you being hands off and without any of your fund being deployed, not sure yet.

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Bill HamptonBusiness Member

Accredited Investment Fiduciary, AIF®, Financial Planner, Tax Strategist, Real Estate Investor · Atlanta, GA · Member since 2012 · 2k+ posts · 978 votes

5y

Parth,

Listen to the advice of the professional tax advisors that have posted here.

Speak to several tax advisors.

Good luck.

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0 Reply

Tushar P.

Member since 2019 · 332 posts · 171 votes

5y

I think it is very unlikely that you can reduce the taxes. If it was that easy, everyone would be doing it. The tax reduction planning has to be done *before* realizing the gains, not after. Even then, Uncle Sam seems to win every time. Not sure if buying real estate is going to cut it. Maybe donate all the earnings to a charity, but then you would not be paying taxes because you have no earnings.

Only sure way to not pay any taxes is to give up US citizenship, but that is perhaps beneficial only for older retired people.

0 Reply

Zachary Beach

Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes

5y

@Parth Patel be married to a real estate professional or become one. Get a ton like tens maybe a hundred million in real estate that you can get bonus depreciation on and that’s very highly leveraged and don’t make to much cashflow or you will pay taxes still so go for expensive appreciating markets.

I would just focus on getting real estate some taxes will still happens. My places cash flow so well even fully leveraged they out cashflow my depreciation and deductions.

2 Reply

AJ ShepardPro Member

Real Estate Syndicator · Portland, OR · Member since 2014 · 453 posts · 312 votes

5y

@Parth Patel

Sounds like a real buying real estate is a good idea, you’ll want to make sure you are considered a real estate professional on your taxes to be able to offset other business gains and losses (you have to work a certain amount of hours in real estate per year)

Consider purchasing at high leverage points if at all possible, and doing cost segregation’s on your properties. This will bring the write offs for depreciation up in the schedule and hopefully offset some of your other gains.

I haven’t done this personally, but I have heard of purchasing mobile home parks with trailers. The trailers (homes) can be considered a vehicle and can depreciate at a much faster rate than property improvements. Usually, if leveraged, your net write off is more than you invested in the first year.

I’m not a tax professional and cannot and am not giving such advice.

1 Reply

Steve Morris

Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes

5y

If those numbers are correct, I'd move some place with an extradition treaty. If you stay, are you married? Asking for my wife's girlfriend.

Important - What tax year did you realize the income? Did you get it from selling investment property (for a 1031).

Even if this year and NOT a 1031, you may be stuck with a large bill since you can only write off so much depreciation and acquisition costs and mortgage debt even if you spend all of it.

AM NOT A CPA SO CALL ONE!!!

However, if you do pay $2M, all the starving schoolchildren and old folks in your neighborhood thank you since I'm sure 100% of it will be put to a better use than you can - At least that's what all the politicians say.

3 Reply

Steve Morris

Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes

5y

Originally posted by @AJ Shepard:

@Parth Patel

I haven’t done this personally, but I have heard of purchasing mobile home parks with trailers. The trailers (homes) can be considered a vehicle and can depreciate at a much faster rate than property improvements.

You sure? Trailers are PERSONAL PROPERTY (in OR hence the license plate) and NOT FIXED (ie they need to have wheels and be movable) ATTACHED IMPROVEMENTS (which are depreciable). ASK A CPA, but maybe you can count them as buying inventory.

0 Reply

AJ ShepardPro Member

Real Estate Syndicator · Portland, OR · Member since 2014 · 453 posts · 312 votes

5y

Originally posted by @Steve Morris:

Originally posted by @AJ Shepard:

@Parth Patel

I haven’t done this personally, but I have heard of purchasing mobile home parks with trailers. The trailers (homes) can be considered a vehicle and can depreciate at a much faster rate than property improvements.

You sure? Trailers are PERSONAL PROPERTY (in OR hence the license plate) and NOT FIXED (ie they need to have wheels and be movable) ATTACHED IMPROVEMENTS (which are depreciable). ASK A CPA, but maybe you can count them as buying inventory.

Steve,
That is how it works, when you buy the mobile home park and trailers, the trailers are a vehicle that depreciates or considered personal property which can be claimed as an expense on your taxes. If you are able to purchase the entire thing as an asset and leverage it, usually you have 25-35% into the asset but you get to write off the expenses of 25-50% of the asset because of the deductions. Works way better with leverage.

2 Reply

Ken Naim

Investor · Lake Worth, FL · Member since 2016 · 233 posts · 140 votes

5y

@Parth Patel invest jn commercial real estate ti the tune of 15-20m. The depreciation deduction can be enhanced with a cost segregation study that could reduce you tax burden significantly. Since you have no experience partnercwith someone who does but doesn't have that kind of capital.

3 Reply

Eamonn McElroy

Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes

5y

@AJ Shepard

That is how it works, when you buy the mobile home park and trailers, the trailers are a vehicle that depreciates or considered personal property which can be claimed as an expense on your taxes.

It's not that dogmatic. There is nuance. If the trailers are inherently permanent under case law and authoritative guidance, they're treated as real property and are depreciable over 27.5 yr GDS or 39 yr GDS. Please be careful giving out tax advice if you are not a tax professional.

@Parth Patel

There's a lot of watercooler talk in this thread, as well as individuals stating what they would do in your situation. Tax mitigation strategy should take into consideration your facts, circumstances, and goals. You may not be able, or willing, to take a year's vacation from your career to qualify as a real estate professional and/or it might not be advisable to sideline your career if you are a high earner.

Please get quality advice from competent advisors. You're going to pay for it, but it will be worth it.

1 Reply

Natalie Schanne

Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes

5y

@Parth Patel - Buy a stake in one or more Commercial / Multifamily / office etc. syndications or partnerships and do cost segregation studies so you can turn your $3.5m cash into about $12m of property (70% LTV) and get a write off of $1-2m in year 1.

Alternatively, lose $2,000,000 on some business, meme stock or Bitcoin and file it as a short term capital gains loss.

2 Reply

Michael PlaksPro Member

Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes

5y

Originally posted by @Steve Morris:

If you stay, are you married? Asking for my wife's girlfriend.

The best comment on this thread.

7 Reply

Ola Dantis

Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes

5y

If any of those financial advisors tell you that your idea of flipping a bunch of foreclosed homes is good, then you need to fire that advisor right on the spot!

1 Reply

Tom DegroodtPro Member

Evans, GA · Member since 2016 · 122 posts · 65 votes

5y

Every thing you do needs to make money, If the total focus of a plan is to shelter you from taxes it may be like throwing away the baby with the bath water. That being said, asking questions and gaining some insight will allow you to ask better questions to an advisor. Better questions = better answers.

Good Luck.

0 Reply

Victor N.

Investor · Wellington, KS · Member since 2016 · 256 posts · 188 votes

5y

What ever you did to create enough taxable income to create that liability is probably your best bet to use to pay it.

0 Reply

Matt M.

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

5y

@Parth Patel

Why in earth would you post on a public forum you’ve got $3.5mil cash?

Huge mistake in my opinion

7 Reply

Andrew S.

Rental Property Investor · Helena, MT · Member since 2017 · 282 posts · 117 votes

5y

Short gamestop and hold for 1 year so you don't have to pay short term capital gains. Happy Monday

0 Reply

Eamonn McElroy

Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes

5y

Short gamestop and hold for 1 year so you don't have to pay short term capital gains. Happy Monday

Holding period for a short sale is determined by the holding period of the security used to close the position.

For the overwhelming majority of investors, the security used to close the short position is bought and held fractions of a second before it is delivered to the brokerage house and the position is closed out. This would mean the transaction is generally a short-term capital gain, even if you held the actual short position for more than a year.

4 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

5y

There is not enough information provided for anyone to offer you advice. Source of the income creating the tax burden is part of understanding how to reduce the liability. Is the tax burden from 2020 or 2021? Creating $2M worth of loss by the end of the year could prove difficult. Not only do you have to create the loss, but you have to legitimately be able to take the loss against your other income. I would rely on your CPA and financial advisor since they are the only ones with all the details. Everyone else is guessing.

1 Reply

Paul MoorePro Member

Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes

5y

@Parth Patel. Congratulations my friend! You could be well-positioned to save on taxes and generate some steady cash flow. I recommend that you find and invest with a fantastic mobile home park syndicator who generates high bonus depreciation for its investors.

The math is simple on this and utilized reasonable leverage (like 50% or so). The land is not depreciable, but that is typically about 25-35% of the park's value. The infrastructure is often depreciable as 15-year or less property which means that it can be all depreciated (to generate a large loss) in year one.

Note: This strategy assumes the current tax law (passed in 12/2017) will remain intact in 2021.

Good luck!

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1 Reply

Tushar P.

Member since 2019 · 332 posts · 171 votes

5y

To everyone illuminating the OP about depreciation - why talk about depreciation without mentioning depreciation recapture?

Even opportunity zone investment will only defer the taxes, while the investor takes the risk of losing the gains that are invested.

It may be a reasonable option, but don’t portray as if someone can hit home run with taxes by making real estate investments.

2 Reply

Jai Reddy

Edmond, OK · Member since 2012 · 456 posts · 270 votes

5y

@Tushar P.

Probably because depreciation recapture can be avoided for the foreseeable future through 1031 exchanges and stepped up basis for his inheritors (as the current tax laws stand).

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$2,000,000 Tax Burden at age 26! Please help!

$2,000,000 Tax Burden at age 26! Please help!

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