WHY I LOVE BIG DEALS (AND YOU SHOULD TOO!)
Let me start with a disclaimer that I'm not a tax professional or legal professional. And this is NOT tax or legal advice. It's just some experience and education that I want to pass on. It may or may not apply to your situation. Consult with your own advisor.
We don't talk about tax benefits enough in this industry. Everyone I know loves real estate for the CASH FLOW and for the PROFITS, but once you get a taste of the amazing tax benefits -- and really understand how they can help you -- you start to realize that this is the holy grail.
In fact, people often ask me why I made the switch from single family to multifamily, and why I'm a huge proponent of investing in larger deals?
There are a lot of reasons, but the tax benefits are one of the biggest.
While others like to post big checks bragging about their profits, I prefer to go the other way -- below is a K1 (from just one of my properties) with BIG losses.
This 7-figure loss is what's known as a "paper loss" -- this property didn't really lose money, but thanks to tax incentives provided by the government (depreciation, bonus depreciation, cost segregation, etc.), I get a big tax savings that can offset any other income I generated last year.
As a full-time investor, this 7-figure loss can be used to offset rental property gains, flip gains, syndication gains, W2 income, 1099 income, capital gains or pretty much any other income generated. Between this and other paper losses I have from last year, I will pay very little -- if any -- tax this year.
Now, to be clear, I'm not avoiding paying taxes forever. When I sell this property down the road, I'll be required to pay (recapture) taxes on this amount. But, I'll likely pay a lower rate than my actual (marginal) tax rate, I get many years to invest the savings before I owe that tax, and if I have big paper losses in that year as well, I can use them to offset the recapture tax and push the taxes out even further out!
Smart investors can pile up these 7-figure paper losses for years or decades, deferring paying that tax far into the future. Or, if you can defer until you die, perhaps never pay them.
Long story short, paper losses like these often allow commercial investors to defer their tax burden for many years, and allow us to use the money that we would be paying to taxes this year to instead invest and grow in the meantime.
When you hear about real estate being a great tax shelter, or when you hear about real estate investors making millions and paying nothing in tax in for many years, this is often how they're doing it.
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