Secrets of the Wealthy Real Estate Investor
Written By Kaden Hackney, Tax Strategist at BEC CFO & CPA
You’re scrolling through social media, and you see all these influencers from TikTok talking about becoming wealthy, paying no taxes, and living the dream lifestyle you want. There is a lot that goes into materializing those 3 outcomes. If you’re tired of taking it in the shorts feeling like you’re missing out on the American dream, this one’s for you.
Becoming Wealthy
There is a lot of advice out there from a lot of different people’s perspectives. You have Dave Ramsey shouting at you to pay off all your debt, you have Grant Cardone telling you to leverage debt, and you have a bunch of chatter from random people in between.
Which of these paths is right? That is for you to decide. This is a no BS answer. You need to take ownership for what you are willing to risk and what you want. “I don’t know how” is not a valid excuse today. Your real problem is “I don’t know who.”
Act and find someone a few steps ahead of you on their Real Estate journey. Understand that you are asking a huge favor of this person and find ways to serve them too. If they are getting good results, they will be able to show you:
· Business Strategy
· Path to Financing
· Key Performance Indicators
· Resources of the Trade
You do not have to reinvent the wheel. There are books, tutorials, and podcasts that teach the theory and explain the practice.
Before you go jumping unawares into Real Estate, I highly suggest you find yourself a mentor or buy a coach, a CPA, and an attorney. You don’t know what you don’t know, and it could set you back further than when you started.
Paying No Taxes
I am going to take all the mystery out of this for you and be blunt; YES, it is possible to pay no income taxes and cashflow into the millions. Our team works with Real Estate Investors who enjoy these outcomes. You’re reading this because you want to know how someone can do that. So, let’s look at a few key considerations.
First, I see some commonalities among our clients who pay less taxes. Among these commonalities are:
· Business Owner
· Rental Real Estate Portfolio
· Tax Strategy and Planning
· Execution and Compliance
In addition to these factors, there is one major tax strategy among our $0 tax clients that allows them access to some of the most favorable parts of the tax code: the Real Estate Professional status.
Real Estate Professional Status
Business owners spend their time running their business which gets taxed as ordinary income. When they buy rental properties, the properties will generate tax losses, but these are categorized as passive losses and get disallowed and carried forward to offset future passive income.
A handful of decades ago, the IRS decided to set strict limitations on how and when passive and investment losses can be used to offset ordinary income.
The Real Estate Professional Status is one way to pierce the IRS passive activity limitations. It is assessed on a year-to-year basis and requires taxpayers to comply with the following rules:
· Material Participation in Real Estate Businesses (5% or more owned)
· Minimum of 750 hours in Real Estate (5% or more owned)
· 51% or more of all your personal services that year were in qualified real estate activities.
Sounds simple, right? Well, there is more to it and the IRS will hold you accountable.
If you can spend your time correctly to qualify and document your compliance with the IRS regulations, the flood gate to favorable tax treatment opens. Your passive rental real estate losses will qualify for recharacterization to offset ordinary income. When coupled with other tax strategies such as Cost Segregation Studies and Bonus Depreciation, the savings become exciting. These tax savings provide savvy real estate investors with stronger cashflow which propels their wealth building at an accelerated rate.
Summary
Don’t try to do everything by yourself. Successful people build teams around themselves that can help them accomplish their goals. America was not built by one man, and neither is your American dream. Get after it. Carpe diem.