Is a 23% Effective Tax Rate Too High?

Question

Hey BP Fam,

I just got off the phone with my CPA and it sound like me and my wife's effective tax rate will be upwards of 23%!! When I first started in real estate last, everyone made it sound like an incredible tax haven, etc. Unfortunately, I have not had that same experience first hand. I am being told that many of the tax benefits are not applicable if your income surpasses a certain threshold. My wife has a W2 and I am a 1099 real estate agent in WI. We own LTRs in Wisconsin and STRs in the Smokies near Pigeon Forge. We run all properties thru our LLC and I have a separate LLC for my realtor business.

Are there any CPAs that can weigh in on this? I want to make sure I am utilizing as many tax benefits as possible. And, maybe I am! But, would love to hear some of your tricks of the trade if you'd be willing to share.

Thanks,

Luke

Basit Siddiqi · Answer

@Luke J Nelsen1) Given that you are a real estate agent, you may be eligible to claim real estate professional status which will not restrict you from the income limitations of 'real estate tax' benefits.2) 23% effective tax rate is all relative.If someone is making Net income of $1,000,000, 23% may be low.if someone is making $200,000, it may be considered high3) We also don't know if the 23% effective rate is just federal or Federal + State.Best of luck

Nathan Gesner · Answer

Too many questions to know the answer. My wife and I earn are W-2 employees under our property management company and we earn commissions from sales. We have 12 investment properties totaling 33 rentals. We give at least 10% to charity and we have a ton of write-offs from our company and our investment property. Last year we earned enough to be in the 35% bracket. Thanks to write-offs, we ended up in the 12% bracket. We have a new CPA this year and expect to drop even more.

You have to find a good CPA. My previous one was good at filing our taxes, but she wasn't so great at building strategies to reduce taxes even more. My new CPA projects we'll pay $24,000 less this year than last, despite increased earnings!

Marcus Auerbach · Answer

@Luke J Nelsen sounds pretty typical. The 1099 agent income is hard to offset, because we don't have many write offs as agents. Claiming real estate professional status only works if your real estate is actually making losses. You can push that with cost segregation, but that just comes back to you later. Electing s-corp status and giving yourself a monthly paycheck can help you a bit. And yes it's worth while to look for the best CPA you can. You want someone who does not only file your taxes, but also helps you lay out strategy for the next year - there is only so much you can do after the fact. I am used to over 50% income tax in Europe, so you won't hear me complain about 23% :-)

Bjorn Ahlblad · Answer

My wife and I are full time RE and we have a great CPA. We pay what we think are fairly reasonable taxes. Three years ago we got our first ever tax refund-I was aghast!

Is a 23% Effective Tax Rate Too High?

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