All Forum Posts by: Melanie Baldridge

This is the simple playbook that tons of Americans have used to build wealth over the last 2 decades:

1. Earn free cashflow from their business.

2. Invest their personal profits into real estate.

3. Do a cost seg study and take bonus depreciation to offset other income. (This works best when you or your spouse are RE pros)

4. End up with a lot of cash and little to no tax each year.

5. Make more money, buy more buildings, and repeat.

These folks have compounded their wealth significantly faster than their W2 counterparts since they don't lose 30-50% to taxes each year.

Imagine making millions of dollars throughout your career and then having to pay Uncle Sam 30-50% every year instead of compounding that cash over time.

This is exactly what real estate professionals have learned to mitigate.

To reduce their taxable income, they buy a building every year, do a cost seg, and use depreciation to reduce their tax liability dramatically.

Their personal wealth snowball grows much larger and much faster than their W2 counterparts who give most of their money back to the government each year.

Following this strategy as a real estate professional is one of the best ways to end up with a much larger net worth at the end of your career.

Great photo of the RE Cost Seg team at ReConvene this week!

Zac, Mitchell, and Anya are having fun seeing both new and familiar faces in Santa Monica right now.

To qualify as an RE Pro you must:

1. Spend more than half of your total working hours in an RE business in which you materially participate.

2. You must work at least 750 hours per year in a qualified RE business.

So most people who have high-earning W-2 jobs outside of real estate won't qualify.

But the unique thing about RE pro status is that even if you don’t qualify but your spouse does, you can both file jointly and claim the losses from your RE investments to offset your other active income together.

It's an incredibly powerful benefit if you do meet the criteria.

Quote from @Costin I.:

@Melanie Baldridge - Yes, we do file jointly + wife works part-time, 4hrs a day, roughly 1000 hours a year. I work FTE W2. She covers our LTR portfolio property management activities, and I assist during weekends (Saturdays are always busy with rental stuff for us).

1. So, does that mean that for her to qualify as REPS, she needs more than 1000 hours of material participation in our rental management or only 750 hours?

2. If she needs 750 or 1000 hours alone on her side, what's to combine? 1000 is more than 750 and more than 500 required for material participation. How do you combine spouses time?

Yes, to qualify as a real estate professional, either spouse must meet the 750-hour requirement of material participation, where more than half of their personal time/services must be devoted to real estate activities.

If your spouse works another part-time or full-time job, it may be difficult to demonstrate that more than half of her working hours are focused on the real estate business.

If not, you should qualify as you exceed the 750-hour threshold of material participation.

As always, it's a good idea to consult with your CPA to ensure you meet the requirements and can take full advantage of the RE Pro status and the deductions available.

The tax advantages of buying/holding gas stations are pretty great.

Many of the components of gas stations including pumps, tanks, external parking areas, and other equipment are classified as either 5 or 15 year property so you can bonus depreciate a lot of it (minus the land value) and get significant deductions in year 1.

With the current bonus depreciation rate at 60%, a $1 million gas station acquisition could still lead to $100K+ in year 1 deductions depending on the specifics of your deal.

There are several different types of income in the US tax code.

Two main types are “active income” and “passive income".

Active income is money you earn from working, such as wages from a W-2 job or income from running a business.

Passive income is money you earn from investments like real estate, stocks, or rental income from your RE portfolio where you earn $ without actively working.

Normally, you can't use passive losses (like losses from real estate investments) to offset active income like your salary from a W-2 job.

That is unless you are an RE Pro.

The reality is, that Real Estate Pro status is just a filing status similar to filing married or jointly.

And if you are a real estate professional you CAN use passive real estate losses to offset active income from other sources.

To qualify as an RE Pro you must:

1. Spend more than half of your total working hours in an RE business in which you materially participate.

2. You must work at least 750 hours per year in a qualified RE business.

So most people who have high-earning W-2 jobs outside of real estate wouldn't qualify.

But the unique thing about RE pro status is that even if you don’t qualify but your spouse does, you can both file jointly and claim the losses from your RE investments to offset your other active income together.

It's an incredibly powerful hack if you do meet the criteria.

In other words, marry a real estate agent who's an RE Pro!

We’re being funny because there's still a bit of nuance here.

There are strict guidelines and it's sometimes a blurry line between being an RE pro vs not.

Always talk to your CPA to see if you qualify.

That said, the benefits are definitely worth it if you do.

Quote from @Costin I.:

@Melanie Baldridge - can you elaborate on "When you are a material participating RE pro all of your and your spouses’ RE activity becomes active, allowing you to offset RE losses against other active income. One pitfall of a RE Pro spouse if you are full-time W-2." ?

Can the spouses participation be combined? 

If one spouse works part-time and is the main active participant, can you combine time with the other spouse (even if he has a FTE W2)?

Can you shed clarification when spouses participation can be combined?

Thanks, Costin!

Yes, you can file jointly if you or your spouse qualify as a Real Estate Professional (RE Pro) and share the benefits.

To qualify as an RE Pro you must:

1. Spend more than half of your total working hours in an RE business in which you materially participate.

2. You must work at least 750 hours per year in a qualified RE business.

So most people who have high-earning W-2 jobs outside of real estate won't qualify.

But the unique thing about RE pro status is that even if you don’t qualify but your spouse does, you can both file jointly and claim the losses from your RE investments to offset your other active income together.

It's an incredibly powerful benefit if you do meet the criteria.

Quote from @Account Closed:

Quote from @Samantha P.:

Oh just to clarify - I'm wondering if an international real estate purchase is eligible for cost seg, with the understanding that it couldn't also do bonus depreciation and that it has a different depreciation schedule. For the purpose of, say, minimizing capital gain in the same year. 

 I dont think it is, @Melanie Baldridge feel free to jump in but foreign assets like this usually follow the tax code from that country. Not sure if there is a way around this 

 Yes, exactly. 

Quote from @Samantha P.:

In case anyone else is wondering about this, it's my understanding after doing a ton of research (but not having talked to a professional) that bonus depreciation only applies to properties in the US (not international properties). If someone could verify, that would be great. 

I'm wondering if cost seg can still be done just without taking the added bonus depreciation - it seems that perhaps it can. 

Yes, it's US only.

And yes, you can elect not to take the bonus depreciation you are eligible for after doing a cost seg.