Happy 4th everyone! With the world cup happening on home soil, and the 250th anniversary of our independence, it’s truly an amazing time to be living in a country with so much opportunity. Let’s continue to prosper through learning and utilizing the resources we have at our disposal. The key to financial freedom doesn’t have to be 40 years away, it’s right at your fingertips, and by reading this newsletter, you are getting one step closer!

Let’s dig into this edition on how to maximize the benefits of our tax system.

Because I struggled understanding it myself for so long, I want to show you what it really means when people say that real estate is tax advantaged over other investments, and how that can benefit you. 🫵

Although there are niche tax saving strategies, I want to focus on the most commonly utilized: Depreciation.

What is Depreciation?

Depreciation is your friend. It is arguably the primary advantage real estate has over other investments, and it works beautifully together with stock portfolios. Let’s jump into 2 different scenarios to give you different options and understanding.

Example 1 of Depreciation:

Let’s say I purchase a duplex for $200,000. The land is worth $30,000, so the building itself is worth $170,000. The government realizes that this building wears down over time, and I need compensation for that wear-and-tear. The government determines, arbitrarily, that the value of the property can be tax-deducted (depreciated) over 27.5 years (39 years for commercial property). What that means is each year I own the property, I can deduct…

$170,000/27.5 years = $6,182 per year in tax write-offs

So let’s say I make $12,000 in rental income on this property per year. I will only have to pay taxes on less than half of that $12,000 of income, saving me thousands of dollars.

This is an important detail: this deduction cannot be used against W-2 income. It is considered a "passive loss", and can only be used against "passive income". However, just because I can't use it on my W-2 income doesn't mean it's useless. It means I CAN use it against income from other sources outside of my job. That's where stocks and dividends come in... Sure, you can use it against your rental income, but let's say I sell sell some of my stock portfolio and take $6,000 in capital gains. I can use my depreciation on the property to offset those capital gains, and legally avoid paying ANY taxes on that $6,000. 

Now imagine if you have hundreds of thousands, or even millions in property ownership. You could avoid paying taxes all together on your passive income. This is a primary strategy that Savvy investors use to avoid paying taxes.

But wait, what if I don’t want to be a landlord?!?!

There are still juicy tax deductions available if you choose to invest in real estate passively. These are especially useful if you are heavily invested in the stock market.  So let’s run through our second example:

Example 2: of Depreciation:

As an accredited investor, you find an awesome 100 unit apartment complex deal. You decide to invest $100,000 into the company that is purchasing this property. The company does an accelerated depreciation study (Instead of writing off the property value over 39 years, they can condense it into less than 10 years, “accelerating” the tax deductions), and determines that for every $100,000 that is invested in the property, you get a $30,000 tax deduction for that first year of ownership. This tax deduction will come to you in a form called a schedule K-1.

This is huge for you. Why? A couple of reasons:

1. A schedule K-1 form NEVER expires 

2. You can use it against ANY passive income you generate.

That means...

• If you make $30,000 in capital gains with your stocks and sell them, you can use your schedule K-1 against it. You now pay $0 in taxes for those stocks you sold. 

• You want to wait until retirement and use that K-1 to offset taxes when you withdraw from your 401k? Go right ahead. 

• You get paid dividends directly into your bank account every month? You can use your K-1 to avoid taxes

I’ve met individuals who have MILLIONS in negative schedule K-1s, and they will likely never pay taxes for the rest of their lives.

This is what Savvy Investors do.

You can be one of those individuals. You should be one of those individuals. All it takes is meeting the right people to help you find the right opportunities.