“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)
I bet it is no surprise that your tax bill is one of the largest expenses you pay, often more significant than your housing and healthcare expenses. If you have spent any measured amount of time on BiggerPockets, you probably have a high-level understanding that investing in real estate could help you offset some of your tax burdens.
For example, depreciation could help you shelter passive income (and possibly your active income) from your rentals. Using a 1031 exchange when you sell a property could help you defer your depreciation recapture and tax on capital gains. You could remove equity from your rentals tax-free through a refinance and invest in more property.
However, most investors who enter the real estate arena know little about strategically reducing their tax bills. If you’re like me, we grew up being trained to pay taxes. Yes, trained.
Do you think I’m kidding?
I know for me, I was raised to go to school, get a great job, buy a house, get married, start a family, and contribute to my 401(k).
With this “plan”, the only chance of reducing my tax burden was to take a standard deduction, deduct my mortgage interest (if I could), get a tax credit for my kid, defer my income to retirement, and hope the tax rate would be low by the time my career came to a close and I had to pull from my retirement fund.
Somehow, with all of this, I still would wind up paying thousands of dollars in taxes.
It turns out that hope is not a strategy.
How the best in real estate approach taxes
I’m not a CPA, accountant, or tax guru. As with any advice, please consult a qualified tax strategist to understand how the information I’m about to share with you can apply to your unique situation.