Specialist · Allentown, PA · Member since 2017 · 25 posts · 9 votes
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.
@Jai Reddy except to advise someone to plan as if the 1031X will still be there when the current administration has made it clear they want to eliminate it is foolish. If the OP were to make an investment on the basis of using depreciation to avoid a tax hit now with the expectation of being able to delay recapture later with a vehicle that has a strong chance of being eliminated before he gets there he will get burned badly.
Cost seg is likely your best bet. But don’t buy a dog just to avoid Uncle Sam. You likely have the ability to make a ton of money and your time might be best spent doing that instead of stressing on not paying Cesar what is Cesar’s dealing with a new field. Or maybe you sold your company and have nothing to do in which case cost seg may be a great fit for you.
Also agree with others. Don’t say you have 3 Mil burning a hole in your pocket on a giant public forum. Lol. RIP inbox.
@Jai Reddy except to advise someone to plan as if the 1031X will still be there when the current administration has made it clear they want to eliminate it is foolish. If the OP were to make an investment on the basis of using depreciation to avoid a tax hit now with the expectation of being able to delay recapture later with a vehicle that has a strong chance of being eliminated before he gets there he will get burned badly.
OP should hear both the pros and cons and then take them to an advisor. Tax planning is not a one year look-ahead but one would take advantage of what's available today giving it more weightage than what someone proposed in their tax plan but is mum after having won the election
You mentioning it is good, as well as mentioning that there’s ways to avoid depreciation recapture. This being an open ended forum, I don’t think all of us communicate all the nuances of what all the possible scenarios are.
Each one of us is going to give more weightage to what we think is a ‘legal out’ for taxes. OP will have to hear what everyone has to say even though not everyone will cover everything there is to be said on the topic.
You mentioning it is good, as well as mentioning that there’s ways to avoid depreciation recapture. This being an open ended forum, I don’t think all of us communicate all the nuances of what all the possible scenarios are.
Each one of us is going to give more weightage to what we think is a ‘legal out’ for taxes. OP will have to hear what everyone has to say even though not everyone will cover everything there is to be said on the topic.
It is important to understand, although you can accelerate depreciation in the early years to create larger tax write offs, it decreases available deprecation in future years. In those future years, income is likely to increase as rents increase, so this can create a larger than expected tax liability down the road.
You can exchange into another property, but a 1031 exchange transfers basis. That means "used" deprecation is transferred. You end up with less deprecation on the new purchase.
Using these strategies on taxes, you are basically kicking the can and every time you kick, it goes less distance. The taxes start to catch up to you.
Yet another nuance that is not commonly known. Thanks.
In kicking the tax can down further, if the owner ends up retiring from their W2 and is only receiving rental income from their depreciating (on-paper) properties, hopefully their marginal tax bracket is much lower and therefore, by having accelerated depreciation earlier on at a higher tax bracket, they’ve maximized tax savings.
Another recommendation from a seasoned tax pro is, take all the depreciation (or all the tax savings now while you can). Future tax laws could eliminate it for certain income brackets, or, extend the standard depreciation over far more years (than the current 27 and 39 year period). Anything can happen in the future. If you have your depreciation cake now, eat it now.
Yet another nuance that is not commonly known. Thanks.
In kicking the tax can down further, if the owner ends up retiring from their W2 and is only receiving rental income from their depreciating (on-paper) properties, hopefully their marginal tax bracket is much lower and therefore, by having accelerated depreciation earlier on at a higher tax bracket, they’ve maximized tax savings.
Another recommendation from a seasoned tax pro is, take all the depreciation (or all the tax savings now while you can). Future tax laws could eliminate it for certain income brackets, or, extend the standard depreciation over far more years (than the current 27 and 39 year period). Anything can happen in the future. If you have your depreciation cake now, eat it now.
I agree, take whatever tax advantages you can sooner rather than waiting. That being said, in some circumstances there is cost involved in accelerating, like when doing a cost segregation study. You have to weigh the advantages versus cost. Also to your point, it depends on future anticipated tax bracket. You could even argue that taxes are lower today than they will be in the future. In some situations pay taxes on gains now may be a better than delaying. A 26 year old is generally just starting their growth in income and usually at that age a person is in a lower tax bracket. Obviously in his case something else is going on to have $2M tax burden. Usually people in their 30's and 40's see the largest increases in salary. It really depends on his situation.
I looked into buying some rentals so that I could use the depreciation loss from rentals to offset the gains from passive syndications. But realized it’s not worth the hassle. Uncle Sam is not a dummy - he is always 2-steps ahead. He is not going to let anyone take “his money” just like that. Even giving up US citizenship comes with a big settlement.
Depreciation recapture is taxed at a higher rate than long-term capital gains, and earning very little to avoid paying taxes (by being in a lower tax bracket) is a regressive strategy. It’s always easy to not pay any taxes by earning very little.
Uncle Sam probably wants everyone to do 1031x so that someone else can take the risk of making investments to grow the economy. Uncle Sam will make money even if the investment goes south. And he has created conditions which will mean paying more taxes (than saved via depreciation) if someone wants to actually realize the gains instead of doing 1031X. It’s quite contradictory for those who want to take the tax benefits “now” but are left with the only choice of leaving it for their heirs (which is better than saying they don’t want to pay more taxes than what they saved). There are much better ways to leave money for heirs than via real estate properties. I’m sure professional CPAs on biggerpockets will disagree, as everyone’s situation is unique.
@Jai Reddy no disagreement here. I was just saying that shouldn’t be the OP’s only or primary approach. I would rather plan as if it won’t be there and be happy if it still is.