All Forum Posts by: Jason Malabute

Hey Eli,

Good question! While the 6% property tax can seem high, I'd recommend looking at the full picture. Beyond taxes, consider how the cash flow and ROI stack up. Does the rental income and appreciation potential still make sense? Also, think about the bigger market factors—how's the job market and population growth in Lexington? Those are key to demand and long-term value.

It all comes down to your underwriting. Are you accounting for everything—taxes, property management, maintenance, insurance, reserves—and still hitting your target returns?

Hope that helps, and feel free to reach out if you want to dive into this more!

Hi Matthew,

I haven't heard of those specific banks, but I have heard great things about Advanta IRA as a self-directed IRA custodian. They might be worth looking into. I also enjoy their YouTube content—super informative about how to use self-directed IRAs for real estate investing. Definitely planning to check them out myself!

Best of luck!

If you're looking to defer taxes on that $400k bonus, as Sean pointed out, one way to do so is by qualifying as a real estate professional. This means meeting the 750-hour rule, the 50% rule, and the material participation rule of 500 hours. Beyond that, you can look into contributing to your IRA or maxing out your 401(k) within the limits for 2024—$7,000 for IRA contributions and $23,000 for 401(k). If you're a business owner with no employees or only part-time employees working less than 1,000 hours per year, you could set up a solo 401(k) and contribute up to $69,000, which includes both employee and employer contributions. Many real estate investors also leverage their IRAs and 401(k)s, including solo 401(k)s, to invest in more deals while deferring taxes. It's definitely worth exploring these strategies!

If you're itemizing your deductions, another great strategy is making a strategic donation to a charity or organization you believe in, like your favorite nonprofit or your church. Not only does this lower your taxable income, but it also allows you to support a cause you're passionate about. Combining this with other tax-deferral strategies, like maxing out your IRA, 401(k), or solo 401(k), can help significantly reduce your tax burden while aligning with your personal values. It's a win-win! I would highly recommend proactive tax planning if you are in this situation.

Hi Glenn, interest income from loans is generally taxed at your marginal tax rate as ordinary income. Whether you classify it as business or personal income depends on the nature of the lending activity. If it’s substantial, it might be considered business income. Joshua’s point about local taxes and solo 401(k) options is spot on—it’s worth discussing with your tax advisor for a tailored strategy. Hope this helps

 You cannot offset nonpassive income with passive income unless you are REPS or you make less than $150k MAGI because there is a special $25k PAL allowance

To qualify as a Real Estate Professional (REPS), you must meet three criteria: the 50% rule, meaning more than half of your total work hours must be in real estate activities; the 750-hour rule, which requires you to work at least 750 hours in real estate; and material participation in your properties. Since your involvement is primarily as a passive investor in syndications, you’ll need to evaluate if you meet these requirements, as REPS generally favors those who actively manage their properties. Qualifying as a Real Estate Professional (REPS) is assessed annually. Meeting the requirements one year doesn’t guarantee qualification in future years, especially if your level of involvement changes. 

As a general partner on two syndication deals, I’d recommend reaching out to your main sponsor to understand how depreciation is allocated between general partners and limited partners for that particular deal. If there is preferred equity in the deal, it can also affect how depreciation is divided among investors. 

Depreciation recapture is triggered when a property is sold, requiring the investor to pay taxes on the portion of gain attributed to previously claimed depreciation deductions.

Hi Elizabeth,

Using a self-directed IRA to invest in real estate can indeed be a viable option, but there are several important considerations to keep in mind.

 As you’ve noted, any loan used by your solo 401(k) must be non-recourse, meaning you can’t personally guarantee it. This can limit your financing options and potentially lead to higher interest rates.

Be cautious about prohibited transactions and disqualified persons, as outlined by IRS rules. For example, you cannot purchase property directly from yourself or a close family member, and you or any disqualified persons (such as family members) cannot use the property personally. Violating these rules can lead to severe IRS penalties, including disqualification of the tax-advantaged status of your retirement account.

Each self-directed retirement account must have sufficient funds to cover all property-related expenses, as you cannot personally pay these expenses. If you’re considering holding multiple properties, managing cash flow within the account to cover these expenses is crucial.

If you convert a Traditional IRA to a Roth IRA, be aware of the tax consequences, as the conversion amount is taxed as ordinary income. This could significantly impact you if the Traditional IRA balance is large. Additionally, unrelated business income tax (UBIT) might apply if your property is financed.

One option to consider is partnering funds from multiple accounts or other individuals to share in the investment, which may avoid the need for difficult-to-secure non-recourse financing. However, ownership distribution must be clearly outlined based on each party’s financial contribution, and income and expenses must be divided accordingly.

You might look into forming an LLC or limited partnership to pool funds, which can streamline asset management. However, disqualified persons cannot be involved as partners if they're prohibited from benefiting from the investment.

Overall, investing through a self-directed IRA is a strategic way to diversify retirement funds into real estate. However, strict compliance with IRS rules is essential to avoid penalties and preserve the tax advantages.

Best of luck with your investment!

For transactions like this, the Real Estate Excise Tax (REET) in Washington typically depends on the property’s value and may be progressive. In some cases, exemptions or adjustments might apply for buyouts between co-owners, so it’s best to check directly with a local real estate attorney or tax advisor to confirm the exact tax amount and any applicable exemptions.

1. Yes, you could do that, but do you really want to? The tax code is complex, and as a new real estate investor, you already have a lot to learn about real estate investing. Do you want to add studying the tax code to that as well?

2. Yes, duplex expenses need to be prorated between the side you occupy and the side you rent out.

3. Improvements generally need to be depreciated over 15 years, depending on the type and cost.

4. Tax strategies depend on factors like property type, participation level, and your goals.

5. Depreciation for a long-term rental is over 27.5 years, starting when the property is “placed in service.”

To qualify for material participation, you generally need to meet either the 500-hour or 100-hour rule. The 500-hour rule means spending at least 500 hours actively managing your rental property, which could include things like tenant communication, maintenance, and bookkeeping.You can also group multiple properties together as one “activity” to make reaching the hours easier. Meeting these requirements could allow you to offset W-2 income with deductions like bonus depreciation and cost segregation. This is assuming you passed the 750 hour rule and the 50% rule to qualify as a REPS