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  • How to pay no taxes

    How to pay no taxes

    There are many ways to build wealth. But, what many people don’t think about is that paying LESS in taxes also contributes to building wealth.

    There are several ways to pay less in taxes – contributing to a 401k/HSA or utilizing tax credits. However, the most powerful method to reduce taxes (even down to $0), is through real estate.

    Here are three main ways to significantly reduce your taxes, depending on your circumstances:

    1. You make less than $150,000 (modified adjusted gross income)

    If you earn less than $100,000, you can claim a real estate loss deduction of $25,000 (the maximum allowed for this strategy) and apply it to your W-2 income. How do you generate a loss? With the help of bonus depreciation and cost segregation (more on it later)

    This will save you $25,000 * 22% = $5,500 in taxes.

    If you earn between $100,000 and $150,000, the maximum deduction of $25,000 is reduced proportionally.

    But how do we pay $0 in taxes? Two more strategies:

    2. Short term rental strategy

    The short term rental strategy is a good way to pay $0 in taxes. It’s a little more involved than the first option. Here is the description of the fact pattern:

    • Acquire a residential home.

    • Perform a cost segregation study (which will split your building into components that have a faster depreciation schedule, allowing for rental losses).

    • Depreciate the building. Generally, after performing a cost segregation study, you can depreciate roughly 1/3rd of the building value immediately. So, if you buy a property for $300,000, about $100,000 can be immediately depreciated, generating significant losses due to bonus depreciation. (Currently, it’s a 60% immediate deduction, but a law update is in the works to increase it to 100%).

    • Rent your home as a short-term rental (e.g., AirBnB). The average stay must be less than 7 days.

    • Materially participate in the business (client management, fixing, research), totaling at least 100 hours.

    • Allow all the losses to be taken against your W-2 income. So, if you make $175,000 and get a $175,000 tax deduction due to accelerated depreciation, you will pay $0 in taxes and receive a full refund for all taxes paid from withholding.

    • Repeat the process with your refund money.

    But what if you don’t want to deal with the short term rentals? That brings us to the third and final strategy:

    3. Real Estate Professional Status

    The Real Estate Professional Status (REPS) is a designation by the IRS. If you are a W-2 employee, you will not be able to qualify by yourself. But, your stay-at-home spouse can qualify, allowing the deduction to pass to your combined tax return.

    In practice, I’ve seen doctors making $400,000 a year, acquiring a $1,600,000 apartment building, performing a cost segregation, and deducting the entire $400,000 on their taxes, resulting in paying $0 in tax on a $400,000 income.

    To qualify for REPS status, you must spend (1) over 50% of your work time in a real estate business or businesses and (2) over 750 hours working in all your real estate businesses during the year.

    Real estate is the biggest cheat code for paying $0 in taxes.

    See you next Saturday.

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