Near Tax Free Cashflow with Little to No Taxes in Real Estate

One of the things that peaked my interest in real estate was when I was working on a loan file where the investor had many cash flowing properties and paid little to no taxes. I found this intriguing because we all pay tons of taxes! Through working with RE investors and their tax advisors on I came upon a way to achieve a near tax free investing strategy.

The strategy that the investor employed was not by design at the time, however I made sure to point out the advantages of what had occurred to the client.

The expenses and depreciation on some of the properties exceeded the income so on paper or on tax it showed a loss. This loss then was applied to properties where the income was greater than all the expenses (big time cash flow property) so that at the end of the day the net across the real estate portfolio was near $0 taxable income because the gains were wiped out by the losses. The key I learned in that moment was that this investor was still earning positive cash flow, still building equity, but with little to none of the tax liability because of the tax advantages that were accidentally being employed.

So today I help investors create a fine balance between a portfolio of appreciation focused properties that have more depreciation expense than income (still cash flows a little) to be balanced with properties that are highly cash flow focused so that at the end of the day the income and expenses wipe each out to near $0 taxable income. Obviously this strategy will vary with each person's individual preferences, life style, and risk tolerances. Some investors are okay with some/little taxable income because they are more interested in cash flow than appreciation properties that are generally more expensive or are in pricier areas and this is okay too. It all depends on your specific goals and objectives.

Being able to see the income coming in on bank statements and the near $0 tax liability together was a huge revelation to me as to the power of real estate.

I cannot stress how important it is to seek professional legal and tax advice to help guide you correctly on how to implement the strategy with your financial planner. The above is not meant to constitute tax, legal, or financial advice but merely to discuss a strategy that I've come across by accident and have utilized myself.

Feel free to let me know if you have any questions on how to structure the above cooperatively with your tax advisor and I'd be happy to help address any questions on how the pro's and con's of the above.