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How do the rich not pay taxes?

It’s tax season! We have about 3 weeks left to file our tax return. Is everyone ready? Is this a good time of year or a bad time of year for you?

**The Big Disclaimer: I’m not a licensed tax professional, so don’t take the following as advice. I want to share our experiences of the tax benefits of real estate, and I encourage you to consult with a CPA to discuss what tax strategy is best for you.

Now on to my story:

Before we went all in on real estate investing, this was not a good time of year for us. But now we’re able to capture some of the tax benefits associated with real estate.

There are some obvious tax deductions (which lowers your taxable income) such as operational expenses. These could include costs to maintain and operate the property, mortgage interest payments, property taxes, insurance costs, legal fees, travel expenses, etc.

Then there is depreciation which allows you to deduct the cost of an asset over time. Specifically, there is an expedited version called “bonus depreciation”, which allows you to deduct a significant amount in the first year instead of slowly over the “useful life” of the asset. Last year, our multifamily investments averaged >80% bonus depreciation against our investment. This is a big deal. This enables income from our real estate investments to be tax deferred.

In one instance, we invested $100k into a multifamily syndication, and we were able to put $80,000 ($100k*80%) of bonus depreciation or “losses” on our tax return for year 1. We also received passive income of 8% from that investment, so annually, this would be $8,000 ($100k*8%) which is completely tax deferred due to the depreciation loss.

The only time that the depreciation is recaptured is upon the sale of the property, and we try to minimize the effects of the recapture by investing in another property. My strategy may change depending on new tax reform. Currently, bonus depreciation is slated to phase out starting in 2023, so we'll be sure to keep an eye on upcoming legislation and adapt as needed.

We didn’t initially realize how beneficial it was to invest in real estate from a tax standpoint, but we are thankful we do now! Tax season is now a much better time of year for us compared to before.


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