Tax Strategies

Passive investors who are looking to minimize their tax liability should be aware of tax strategies which include: cost segregation, passive loss limitation, real estate professional status, and deductible business expenses.

• Cost Segregation 

It is a tax planning strategy that can accelerate depreciation deductions for investment properties, resulting in lower tax liability for the investor. This strategy involves separating a building’s assets into different categories such as land, buildings, and equipment, and applying different depreciation rates to each class. By accelerating the depreciation deductions for certain assets, investors can reduce their taxable income and increase their cash flow.

• Passive Loss Limitation

One of the biggest tax challenges for passive investors is the limitation on passive losses. Passive losses are losses generated from passive activities, such as rental real estate, limited partnerships, and other investments in which the investor is not actively involved. These losses can only be offset against real estate passive income, which includes rental income, limited partnership income, and other real estate passive income.

Passive investors who have more passive losses than passive income may be subject to the passive loss limitation, which restricts the number of passive losses that can be deducted against ordinary income. However, there are certain exceptions to the passive loss limitation, such as the real estate professional status discussed below.

• Real Estate Professional Status

Real estate professional status is a tax designation that allows investors who are actively involved in rental real estate activities to deduct their rental real estate losses against their ordinary income. To qualify for real estate professional status, an investor must meet:

• The investor must spend more than 50% of their working time on rental real estate activities.
• The investor must perform more than 750 hours of rental real estate activities during the tax year.
• Passive investors who meet these requirements can deduct their rental real estate losses against their ordinary income, even if they have no other passive income.
• Deductible Business Expenses

Passive investors who own rental real estate or other passive investments may be able to deduct certain business expenses against their passive income. Deductible business expenses may include expenses related to property maintenance, repairs, and management, as well as professional fees and travel expenses related to the investment.

To qualify for these deductions, the expenses must be ordinary and necessary for the operation of the investment activity. Passive investors should keep detailed records of their expenses and consult with a tax professional to ensure that they are taking advantage of all available deductions.

Major Takeaways

• Passive investors must understand the different levels of taxation that can impact their investments.
• These levels of taxation include federal, capital gains tax, estate tax, and property tax.
• To minimize tax liability and maximize investment returns, passive investors should be aware of tax strategies such as the real estate professional status and deductible business expenses.
• Passive investors should keep detailed records of expenses and consult with a tax professional to ensure compliance with tax laws and identify available tax deductions and strategies.
• Understanding the complexities of taxation is essential for passive investors to make informed investment decisions and achieve long-term financial goals

Conclusion

Passive investors can benefit from a variety of tax strategies to minimize their tax liability and maximize their after-tax returns. These strategies include passive loss limitation, real estate professional status, and deductible business expenses. By being aware of these strategies and consulting with a tax professional, passive investors can optimize their tax position and improve their investment returns over time.

How You Can Get in On the Action

Cash Flow Champs is a privately held investment company that focuses on acquiring and managing opportunistic and value-add multifamily real estate properties. The company specializes in repositioning well-located assets in emerging markets surrounded by positive demand drivers such as population growth and job growth.

Cash Flow Champs partners with entrepreneurs and busy working professionals interested in investing in real estate but who lack the time to navigate the process. Alongside our partners, we aim to bridge purpose and profits in a manner that allows us to improve the lives of the residents in our communities and the neighborhoods where we operate.

In the words of Robert Kiyosaki, the poor and the middle-class work for money. The rich have money to work for them. If you are an individual that wants to build and maintain generational wealth through real estate, all while making a positive impact on the lives of residents and the communities where you invest, we’d love to explore opportunities for synergies.

Schedule a brief call with us so we can get to know you better, understand your life goals, and determine where synergies may exist.