We are nearing the end of May, and we all know what that means… That’s right, time to start thinking about next year’s taxes! As part of this journey in Real Estate Investing, one key learning was the difference between tax preparation and tax strategy. In the past, we have used both CPAs and popular software offerings for our tax preparation. Both have their merits, but we have never come up with a strategy ahead of tax time. However, now that we are real estate investors, things are different.
As we’ve come to learn through offerings such as the Rent to Retirement Academy, one of the pillars on which you build wealth is from the tax benefits that come with REI. For buy-and-hold strategies, the biggest benefit comes in the form of depreciation. But wait, aren’t properties supposed to appreciate and not depreciate? Yes, we want the value of the investment to appreciate, but when talking about taxes, depreciation is basically a big write-off that you get on your taxes. The idea here is to take these paper losses, and use them to offset taxable income, save money, and then use that to subsequently reinvest. It is formulaic. Wash, rinse, repeat. Successful investors love tax season, but that’s because they’ve come up with a game plan. i.e. they have a tax strategy.
This will not be a post about our specific strategy for this year, but I will lay out some long term goals here. Consider a doctor with a healthy annual income of $300k. There’s a lot of folks who are going to see that number, whistle, and say “that must be nice.” But then, think about the tax bill! At that tax bracket, around $120k of that is going to go to taxes (quick disclaimer: these are just ballpark numbers, so don’t take any of this as financial advice. In fact, none of this should be taken as financial advice). Over a third of the doctor’s salary is going to taxes. A lot of people, myself included, would wince and groan at the thought of paying that much in taxes.. But what would it be like if the doctor had no income tax, and kept the whole thing? I’ll answer that: not paying taxes on the doctor’s income is effectively like adding a second income.
So, that’s the idea: two incomes for the price of one. Sounds too good to be true, but it is feasible with real estate investing and the right tax strategy. Let’s quickly go back to the doctor example: if they saved $120k cash in income tax, it would basically be like adding another taxable income of $200k to their household. That is extremely powerful. That is more time with the kids, doing hobbies, and investing in self care.
At the moment, my wife and I are nowhere close to this. We have one rental property in Canton, OH and are working on building the capital for investment #2. But simply knowing that this possibility exists and is feasible, attainable, and (most importantly of all) legal, has given us a goal to strive toward. However, a goal by itself isn’t enough, we also need a game plan.
To create this plan, we are going to be shopping for a tax strategist. Of high importance to us is a strategist that either is very knowledgeable about REI or specializes in working with real estate investors. The tax landscape is intricate, and we will be specifically looking for someone who can understand our vision, and provide the guidance that we need to reach our financial goals. This has been another mental shift for us as real estate investors, we (or at least I) now get excited at the thought of tax season. We will be sure to write another article after securing a tax strategist which details why we went with them, and surely another basketful of articles come tax time for tax year 2024. However, in the meantime, we will soon be hitting the market to find a team that will help us establish a framework on which we can use in subsequent investing decisions as we work towards our goals of passive income and financial freedom.
If you haven’t yet checked out our blog posts on appreciating appreciation and using business expenses for tax write-offs, go and check those out. If any of this sounds like a pipe dream, or a snake oil sales pitch, go to google or youtube for some videos on rental property depreciation, accelerated depreciation, and bonus depreciation and have your mind blown.
Thanks for taking the time to read and share in our journey. See you in the next post.
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