How to Use Real Estate to Avoid W2 Taxes

how's it going everybody welcome back to taxes made simple i'm your host carlton dennis in today's video we're going to discuss how to leverage real estate to avoid w-2 taxes i've committed probably the last 12 months of my life studying passive activity loss rules and one thing that i really have gotten really good at is showing other investors showing w-2 taxpayers how to use real estate to avoid taxes on their w-2 income their 1099 income their crypto their stock income their entire portfolio if you're somebody who has a normal w-2 job and you want to figure out how you can invest in real estate and use real estate to offset your taxable income this video is for you we're going to take the time to go over what the passive activity loss rules are what you need to know to position yourself as a real estate investor to use your losses to offset other forms of income let's dive in all right guys i'm going to jump right into this part of the reason why i'm doing this video is because a majority of my taxpayers are high net worth individuals and their high net worth from a bunch of different reasons some of them are w2 taxpayers which means they're making a killing working for somebody else some of them are 1099 contractors which means they're already in s corporations and they're spending tons of money on cars and cell phones and all these different things to try to reduce their tax bill and then i have some of my other business owners who have been business owners for a long time who are making millions if you fall into one of these three categories then you're going to want to listen to this video because i'm going to show you why the wealthy have been playing a game with real estate for years and why certain people just don't understand what it is about real estate that makes it so sexy from a tax perspective maybe you were never taught how real estate can be used to avoid taxes you were just taught that real estate is a great place for you to park your money long term my goal is to make sure that you understand that it's not just a long-term investment for your money it's an investment that's going to help you avoid taxes on other sources of income so we're going to do today in this video is we're going to dive into the ipad and i'm going to go over what the passive activity loss rules are i'm going to try to explain something that's extremely complex tax laws that have been in place since the 80s and make sure that you guys understand it and walk away from this video exactly knowing what you need to do if you were to go into real estate let's jump in all right guys so i'm in the ipad right now and the first thing i want to talk about is the difference between passive income and non-passive income and part of the reason why i want to do this is because the the government created two different buckets back in 1987. in 1987 there was the tax reform act that occurred with ronald reagan and when ronald reagan implemented the tax reform act he got rid of a lot of tax loopholes a part of getting rid of the tax loopholes he implemented the passive activity loss rules and the passive activity loss rules separated passive income [Music] from non-passive income and that is how it's defined inside of the irs tax book so from our non-passive income this is the income that you and i are very familiar with this bucket that sits in the non-passive side is filled with w-2 income 1099 income stock income crypto income social security income which i still don't understand why social security is taxed when we're already paying taxes into social security but anyways this is our non-passive income bucket our non-passive income bucket is filled with things that require us to do work it requires work to have a w-2 job a 1099 job stocks crypto social security these types of income are subject to federal and state taxes and in some cases social security and medicare tax now your passive income on the other hand is income that you receive from work that you're typically not doing when you have passive income you're typically investing your money into a rental property or you're investing your money into a business in which you taxpayer do not materially participate so if you're investing your money into a business or into real estate it's going to be considered passive and normally this is rental real estate that we're looking at over here on this side one of the things that we have to understand as it pertains to non-passive income versus passive income is that the government created a line and the line states that your passive income and passive losses that could be generated from rental real estate cannot hop over to offset your non-passive income okay so 1987 changed a lot of things and you guys will learn more about this if you guys are joining the tax alchemy program but the losses that you generate from rental real estate cannot offset your w2 crypto stock 1099 in social security income you might be thinking carlton why would i want to be at a loss on my real estate taxpayer i completely understand what you're thinking you're not going to be at a loss on your rental you're going to be at a paper loss with your real estate you see when it comes to rental real estate there's paper losses and then there's operational losses if you're running a rental operation and your expenses for running that operation exceed the income you're receiving yeah you're at an operational loss on your books but if you're running a rental property and you're cash flowing and when it's time to file your tax returns you're showing a loss even though you're cash flow positive you have what's called a rental loss a phantom expense which typically comes from depreciation i spent a lot of time discussing depreciation on this channel and part of the reason why is because many business owners are leveraging depreciation to reduce their taxes when you buy equipment when you buy tools when you buy these items inside of your business the government doesn't just let you write everything off in one year typically you have to depreciate items that last longer than one year a computer like a macbook pro is going to last longer than one year a sony camera is going to last longer than one year an automobile is going to last longer than one year the government has aligned to change some tax laws that allow for you to write things off in one year code section 179 plus bonus depreciation which many taxpayers have leveraged but something like rental real estate is going to last longer than one year as a matter of fact rental real estate is depreciated over the course of 27.5 years for residential real estate and depreciation has taken over the course of 39 years for non-residential real estate okay this is a long time guys 27 and a half years 39 years for a non-residential rental property so many taxpayers who are like you and you and i they do research especially when you get into real estate you're going to start doing some research on how you can improve your property on how you can improve your asset that you just spent money on how can i squeeze more orange juice from this orange tree and that's exactly what leads you to understanding more about depreciation your curiosity around depreciation will spike when learning about depreciation you'll start to realize that there are certain taxpayers who take depreciation over 27 and a half years the long durations of time and then there's certain taxpayers who take depreciation over 39 years the long duration of almost 40 years of their life but then you'll start to realize that there are some taxpayers who are taking depreciation in 5 7 10 15 years as opposed to the 27 and a half or 39 years that every other taxpayer might be taking their depreciation over the allotted amount of time that the government has stipulated carlton why is this allowed well why is it allowed for taxpayers to write off a vehicle that weighs over six thousand pounds in one year the tax code allows for it and the tax code allows for you taxpayer to realign your rental property so rather than writing off all of the components that make up your property such as the roof such as the door such as the windows such as the lighting the drywall the appliances all of these components your roof your windows your doors your appliances they don't last 27.5 years they do not last 39 years they do typically last 5 7 10 15 years depending on what item inside of your property we're talking about now if we're talking about the roof the roof is going to last 15 years but it's currently being written off over 27 and a half years if you have a residential property appliances typically are depreciated over five and seven years but maybe your appliances your washer your dryer your refrigerator inside of your rental property is being depreciated over 27 and a half years or 39 years why would i want to have items inside of my house that i'm gonna have to replace every five to ten years written off for me over the course of 27 and a half years that's exactly why real estate investors start doing research that's exactly why they start questioning things taxpayer if you're watching this i want you to question things why do i have to do that you'll find out other people were questioning that exact same thing which led to the tax code being changed enters the cost segregation study what does the cost segregation study mean carlton the cost segregation study means that you are getting the cost associated with your investment property the actual building structure the structure you're segregating all of the components inside of this structure out and you're choosing to write them off over 1 5 7 10 15 and 27.5 okay or 39 so we're creating different ways for us to write off the components inside of our property but someone has to perform the study okay someone like a tax professional company like myself as well that's partnered with an engineering firm we're partnered with an engineering firm we will send out our engineers to your house to take photos of the inside of the house the outside of the house so we can determine all of the little tiny little bitty assets that make up your property all of the real property is what the government calls it so all of this real property that we have we can now reallocate into a 1 5 7 10 15 27 and a half 39 year bucket on the tax returns that creates a loss inside of your passive bucket but on the non-passive side you still have your w-2 your 1099 your crypto your stocks we're still in a situation where performing a cost segregation still does not allow us to use the losses to roll over to offset the w-2 the 1099 the cryptos the stocks and all the other income you got going on so how do we get around these passive activity loss rules the government created we first have to understand them there are three ways to get around the passive activity loss rules that i want you to know and the way to get around the passive activity loss rules is number one is if you make less than a hundred and fifty k a g i i am not speaking to every single taxpayer when i'm writing this i know a majority of you are watching this make over a hundred and fifty thousand dollars adjusted gross income or you make over that when you file married filing joint with your spouse so not too many taxpayers are going to be able to qualify for number one number two states on entire disposition what does that mean that means we're selling our property i.e we're selling when you sell your rental property you can use the passive losses that have been accumulating in the passive bucket to offset the other forms of income the capital gain income that you're going to have from the sell of the property now the other one is by qualifying as a rep i am going to start using acronyms with you guys so you understand how we as tax professionals communicate rep stands for real estate professional whoa carlton am i going to need to go back to school am i going to need to get my real estate agent's license am i going to need to be a broker sir no you're not ma'am no you are not taxpayer no you are not you see what's really cool about understanding the tax code is if we just follow some of these rules we can unlock what we're looking for hearing real estate professional many taxpayers who are watching this are thinking i'm probably gonna have to study and pass some tests to become a real estate professional i'm gonna need some type of experience it's gonna require some amount of net worth that i don't have yet there is no dollar amount associated with qualifying as real estate professional there's no income requirement to qualify as a real estate professional there's no test you need to pass there's no schooling you need to have and there's no background in real estate you need to have qualifying as a real estate professional all it comes down to is two tests both of these two tests have to be passed in order to unlock your passive activity losses to be able to turn them into non-passive lawsuits to offset your w2 1099 crypto and stock income let's go over those two tests a real estate professional is one somebody who's spending 750 hours in their real property trade or business biz in which they maturely participate pardon my spelling i just want to type fast all right guys so rule number one states that you have to spend 750 hours 750 hours that's the magical number just make sure you got it 750 hours in your real property trade or business in which you materially participate okay so there's some words here that we have to understand what is a real property trader business and what in the world does material participation means okay i'm going to simplify this for you because i could spend all day talking about material participation but essentially material participation means that you're managing your own real estate so you just have to get your head wrapped around that okay 750 hours is pretty easy to understand we all have a clock on our wrist so understanding that 750 hours in the year is what's needed you can do the math that's going to come out to about 14 hours a week real property trader business if you're managing your rental you're running a real property trader business so we just broke down this very simply 750 hours materially participating kind of means that i'm managing real property trader business means that i have an investment property that i'm either managing brokering leasing being a real estate agent on there are 11 real property trader businesses okay so let's jump into test number two test number two states that we need to spend more than half our time in our real property trade or business in which we materially participate in okay so test number two more than half of our time is spent in this real estate business in which we are materially participating in okay i'm going to go ahead and say it now most w-2 1099 day traders who are day trading often do not have time to show the government that they're spending more than half of their time in real estate than any other thing the reason why guys is because most w-2 taxpayers work 40 hours a week okay that's almost over 8 000 hours a year okay so you're gonna have to show the government that you're spending more time in real estate 41 hours in real estate than you are in your w2 to 99 day job that's hard to do now i'm going to go ahead and say this for taxpayers who have a spouse it's very easy to qualify your spouse if one of your spouses is working from home or is not currently working at the moment maybe possibly taking care of the the children maybe a husband who's taking care of the kids or wife who's taking care of the kids this is when the wife can qualify or the husband can qualify for these two tests right here to get ourselves to using our passive losses that's the whole reason we would even go down this road we want to be able to use our passive losses okay now i want to speak to the taxpayer who does not qualify for this what can you do what can you do to get to a point where your non-passive income is being offset by passive losses that you might have generated from doing cost segregation studies on your investment properties well there is a loophole it's funny even saying the word loophole but when you think about it the government has made it very clear what things we can't do within the tax code and what things we can do within the tax code in the tax code the government states that short term real estate str does not count as a passive activity under code section 469 which by the way is the entire code section that we're talking about here today 469 just if you want to remember this the government states that short-term rentals do not qualify as a passive activity under code section 469. carlton what are you getting at i think we just found our way that's right guys last year i had probably over 70 clients buy investment properties based on some of my instructing because of the tax savings that they would receive i had clients literally go into short-term real estate for one very particular reason short-term real estate means that you one do not need to meet the reps two part test carlton so you mean i don't have to spend 750 hours you mean to tell me i don't need to spend half of my time no taxpayer you don't have to spend 750 hours you don't have to spend half of your time you taxpayer only need to materially participate that's correct by materially participating in your short-term rental and by running a short-term rental for an average customer use day of seven days or less you can unlock your passive losses to offset your w-2 income to offset your your 10 99 income so let me give you an example and we're going to talk about material participation because i already know where your head's at i already know what you're thinking carlton what what's going on with this whole material material participation you did say that you can talk about it for a whole hour are we going to learn it in this hour maybe okay so let's just say i did a cost irrigation study on an investment property that's 600 000 so i ended up generating a 200 000 paper loss on my tax returns and me and my wife are filing taxes this year she makes 100k i make 100k so we have 200 000 in w-2 income that we paid into what are the taxes we've already paid into we've already paid into federal taxes by the i the r and the s we already paid into state taxes and we paid into social security and medicare okay these are the taxes that the w-2 taxpayers already paid into if i have a 200 000 loss on the passive law side with my rental real estate i'm not even going to pay taxes on that side so everything's going to flow over if i'm leveraging a short-term rental or if i qualify for rep status that means that this 200k let's just put it down here for perspective is getting offset by a 200 000 loss carlton wait a second carlton i have taxes being withheld on every single paycheck okay that's up to you if you want those taxes being withheld after understanding how much losses you have working for you that's up to you if you want to wait 365 days for the irs to file your tax returns so you can get your refund coming back to you based on the federal state taxes that you paid social security and medicare tax you're not gonna get that back but the federal and state taxes you will get back that's correct so you have wiped away your taxes and you're at a zero percent taxable income carlton is this real is this really real guys when i was learning about this i thought like literally literally i had tapped into a super power that i didn't know i had you know how like when you watch like some superhero movies that the like the superhero doesn't get his powers until he's like 17 or 18 or he gets hit by like a bus and finds out he's all of a sudden got super strength that was what was happening to me when i started studying code section 469 so much that i've i've read code section 469 forward i read it backwards and then i read it forward again and then i read it backwards again and then i realized the government put out an audit technique guide on how to audit all this and then i read that and then i read it over and over and over again and then i just came i kept getting to the same results we can leverage passive losses with short-term rentals or by qualifying as a real estate professional we just have to understand what material participation means we just have to understand how much time we need to spend in our rentals being a real estate professional does not mean that you have to be a real estate agent does having a real estate agent license help absolutely it definitely contributes to 750 hours in your real property trader business because now you have a real estate agent's business too on top of just managing your real estate portfolio right so absolutely there are things that you can be doing one of the things that i've done to help you is i've created an entire free training on exactly what material participation is how to leverage real estate to avoid w2 1099 income and the link is below so you guys can jump on this free training it's free and i'm gonna give you access to be able to understand this information if you're following me right now like literally can you pat yourself on the back right now like literally give reach over and try to make sure you can reach over and pat because this is not easy stuff this is advanced tax law if i broken it down in a way that you can understand i'm tooting my horn a little bit so maybe you've already hit the like or the subscribe button but what i want you to know is that there are other taxpayers playing this game they're playing this game some people who are sitting back watching this are thinking but if i front load all this depreciation doesn't mean i won't have all this depreciation later there's always a way for you to get more depreciation i have a method called the rad method that i teach you inside of my program that you will get to learn about by clicking on the link below you'll learn a little bit more about how you can leverage these passive losses in a free webinar if you wish to join the program with some of my other students who are leveraging this you're more than welcome to but we are teaching this game each and every single day real estate will be a part of how i retire and if real estate will be how a part of how you retire wouldn't you want to retire early by offsetting more of your w2 and 1099 income right now knowing that you don't have to spend 750 hours knowing that you don't have to spend half of your time in real estate there is a way out of it my name is carlton dennis if you guys like this video i want you to do something like comment subscribe you know i'm going to come back with more content for you i got you i'll see you on the next video [Music] you

Channel: Karlton Dennis

Views: 444,661

Keywords: understanding your deductions, taxes made simple, tax strategy, tax expert, karlton dennis, taxes made simple karlton dennis, tax deductions, easy tax planning, tax deductions explained simply, easy to understand taxes, in 2021, tax deduction tips, how to pay less taxes, capital gains tax, short term, long term, tax rates, real estate professional tax rules, How to Use Real Estate to Avoid W2 Taxes, depreciation, rental real estate

Id: yfz6kyw3W7k

Length: 26min 13sec (1573 seconds)

Published: Fri Mar 04 2022