The Cost Segregation Study: What STR Investors Need To Know (2025)

Rental Property Depreciation is a killer strategy for reducing taxes.

And short-term-rental (STR) owners need a cost segregation study to reclassify parts of their property from a standard 39-year life to shorter lifespans (say, 5 or 15 years.)

Even as bonus depreciation phases out to 0 percent by 2027, a cost segregation study can still maximize your property’s depreciation benefits.

Let’s take a closer look.

How to Use Rental Property Depreciation to Your Advantage

Rental property depreciation can be a game-changer when it comes to reducing taxes for your short-term rental (STR) business. 

By leveraging strategies like accelerated depreciation, you can take larger deductions in the early years of owning a property, freeing up cash flow and lowering your tax bill. Here’s how it works and why it’s worth considering.

What Is Accelerated Depreciation?

Accelerated depreciation allows assets to lose value more quickly in the earlier years of ownership, rather than spreading the deductions evenly over the property’s lifespan.

Why does this matter?

How Does A Cost Segregation Study Fit In?

The IRS typically allows residential rental properties to depreciate over 27.5 years and commercial properties over 39 years. However, not every part of a property needs to follow this timeline.

Look at it this way. When you buy or construct a property, it includes more than just the building itself. Think about:

If purchased separately, these items could be depreciated over 5, 7, or 15 years. A cost segregation study helps identify these shorter-life assets and accelerates their depreciation, giving you more tax savings upfront.

How Does a Cost Segregation Study Work?

A cost segregation study breaks down the purchase price or construction cost of your property into categories with different depreciation schedules. Here’s the process:

  1. Identify short-life components: Examples include electrical outlets for appliances (5 years) or landscaping improvements (15 years).
  2. Reallocate costs: On average, 20-40% of a property’s components can qualify for accelerated depreciation.
  3. Calculate tax savings: By writing off these assets sooner, you significantly reduce your taxable income in the early years.

What’s Involved in a Cost Segregation Study?

A high-quality cost segregation study includes:

When Should You Conduct a Cost Segregation Study?

Timing matters!

How Much Can You Save?

Let’s crunch the numbers with an example:

Imagine you own a short-term rental valued at $800,000.

Without cost segregation:

With cost segregation:

Now, instead of a flat $800,000 depreciating over 39 years, you allocate $300,000 for accelerated depreciation. This leads to significantly larger tax savings in the first year and beyond.

DIY Cost Segregation Studies—Are They Worth It?

While you can identify some short-life assets on your own, working with a tax professional ensures you get the full benefit of a cost segregation study.


There are two main approaches:

Bonus Depreciation is Phasing Out: Act Now to Maximize Savings

Rental property depreciation, especially when paired with a cost segregation study, is a powerful tool for STR investors. By accelerating depreciation on certain components, you can:

Reap significant tax savings in the early years of ownership

As the saying goes, all good things must come to an end. Under current law, bonus depreciation is being phased out:

If you’re an investor looking to take advantage of this tax-saving strategy, now is the time. The sooner you act, the greater your potential savings before bonus depreciation disappears entirely. 

Want to unlock these benefits? Reach out to a tax professional to see if a cost segregation study is right for your property. The savings could be substantial, so don’t miss this window of opportunity to optimize your cash flow and reduce your tax burden!

BONUS: 12 Common Questions About Cost Segregation Studies

1. What Is a Cost Segregation Study?

Every property is made up of a variety of assets, and each one has a different expected useful life. For instance, tile flooring is much more durable than carpet, right? 

Tax law accounts for these differences and guides how capital expenditures should be depreciated. Using the Modified Asset Cost Recovery System (MACRS):

2. How Are Building Assets Categorized for Depreciation?

A cost segregation study breaks down a property into individual components, assigns costs to each using IRS-approved pricing guides, and places them into different categories based on their depreciation timelines. Here are some common categories:

3. Is Cost Segregation Worth It For Rental Property Investors?

Yes, cost segregation can offer a significant return on investment! While the cost of the study depends on the size and complexity of the property, the benefits often far outweigh the expense. Beyond accelerated depreciation, cost segregation can:

4. What Types of Real Estate Qualify for Cost Segregation?

Cost segregation isn’t just for office buildings or hotels—it can be applied to nearly all types of commercial and residential real estate, including short-term rentals. Popular property types include:

5. Does Cost Segregation Create New Deductions?

No, cost segregation doesn’t create new deductions. Instead, it accelerates existing deductions by shifting them to earlier years of ownership. This lets you take advantage of the time value of money by getting tax savings sooner.

6. Can I Do a Cost Segregation Study Myself?

While cost segregation may seem straightforward, a quality study requires expertise. A professional will conduct a detailed forensic analysis of the property, breaking out assets, assigning costs, and ensuring compliance with IRS rules. This level of precision is key to maximizing your tax savings and minimizing audit risks.

7. When Is the Best Time to Perform a Cost Segregation Study?

The best time to perform a cost segregation study is right after a property is purchased or constructed. This ensures the study accurately reflects the assets in place when the property is first put into service, maximizing your tax benefits from day one.

8. How Far Back Can You Do a Cost Segregation Study?

You can conduct a “look-back” cost segregation study for properties purchased in previous years. This allows you to claim missed depreciation without amending past tax returns by filing Form 3115 to catch up on deductions.

9. Can Cost Segregation Studies Be Used as a Planning Tool?

Absolutely! Cost segregation can be integrated into your tax planning strategy before a property is purchased or constructed. For example, you can:

10. How Does Bonus Depreciation Relate to Cost Segregation?

Bonus depreciation allows you to take an additional write-off for assets with a class life of less than 20 years. It’s a powerful tool that complements cost segregation, as the study identifies assets eligible for bonus depreciation. Under the Tax Cuts and Jobs Act, the bonus depreciation rate was 100% for assets placed in service between 2017 and 2022. This rate dropped to 80% in 2023 and will phase out entirely by 2027. Despite the reduction, cost segregation still provides significant tax benefits.

11. Is Cost Segregation Useful for Renovation Projects?

Yes! While cost segregation is commonly used for newly purchased or constructed properties, it’s also valuable for properties undergoing major renovations. By quantifying and categorizing assets before they’re retired, you can take advantage of the partial asset disposition (PAD) election to write off the remaining value of disposed assets. Renovated assets classified as Qualified Improvement Property (QIP) may also qualify for accelerated depreciation or bonus depreciation.

12. What Is Qualified Improvement Property (QIP) and How Is It Connected to Cost Segregation?

QIP refers to interior improvements made to nonresidential buildings after they’ve been placed in service, excluding structural changes, expansions, or upgrades like elevators. Thanks to the CARES Act, QIP now has a 15-year recovery period, making it eligible for bonus depreciation. Cost segregation helps identify and categorize QIP assets, ensuring they are accurately valued for depreciation purposes. This is especially beneficial for landlords providing tenant buildout allowances, allowing for faster tax savings on these investments.

Deductions for 2025 (Tax Year 2024): A Beginner's Guide

You’ve worked hard to get where you are, and one thing you’ve no doubt learned along the way is that tax season is usually the biggest pain when you’re managing your accounts.

And if you’re not familiar with the deductions you may qualify for that pain is even worse.

Don’t pull your hair out over the confusing (and ever-changing) tax code— just need some help from the right advisors. Then you can lower your overall tax bill and keep more of your hard-earned money.

In this guide, we’ll break down the essentials of tax deductions for tax year 2024 (what you’ll file in 2025). Whether you’re an individual filer, a small business owner, or someone looking to maximize advanced tax-saving strategies, this article will provide you with the tools you need to take control of your taxes.

We’ll start with standard deductions, the simplest way to lower your taxable income. Then, we’ll explore business deductions, which can help entrepreneurs and freelancers save big. Finally, we’ll dive into advanced deductions, perfect for those looking to optimize their finances with more complex tax strategies.

Let’s get started on your path to smarter tax filing in 2025!

Standard Deductions

As usual, taxpayers, including business owners, can choose between standard deductions and itemized deductions when filing their 2024 income taxes. 

(The standard deduction or itemized deductions differ from self-employed business expense deductions. To maximize your deductions across all income types, we highly recommend you get the tax advice you need for your specific situation.)

Many prefer the standard deduction offered by the IRS due to its simplicity. This fixed amount reduces taxable income and varies based on your filing status. The IRS has increased the standard deduction to account for annual inflation. The standard deduction for married couples filing jointly for tax year 2024 rose to $29,200, an increase of $1,500 from tax year 2023. 

For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600, an increase of $750 from 2023. For heads of households, the standard deduction is $21,900, an increase of $1,100.

The standard deduction amounts for tax year 2024 (taxes filed in 2025) and for tax year 2025 (taxes filed in 2026) are as follows:

Filing status  2024 standard deduction  2025 standard deduction  
Single $14,600 $15,000  
Head of household  $21,900 $22,500  
Married filing jointly   $29,200  $30,000 
Married filing separately  $14,600 $15,000 

Business Deductions

The more tax deductions your business claims, the lower your taxable profit—and that means more money in your pocket.

But knowing what’s deductible and following IRS rules is key. Also, you and your CPA need to know the difference between credits and deductions for businesses and how to claim them on your tax return. 

In simple terms, a deduction is an amount you subtract from your income when you file so you don’t pay tax on it. A credit is an amount you subtract from the tax you owe. Here are credits you can claim when you file your taxes this year.

As for business deductions, claiming as many of them as you're entitled to can make a big difference for your bottom line. 

So, the question now becomes …

What Deductions Can Your Small Business Claim?

When totaling up your business expenses, remember these common deductions:

Auto Expenses

If you use a car for business, you can deduct costs like gas, maintenance, and even depreciation. There are two ways to calculate this:

Startup Costs

Getting your business off the ground? You can deduct up to $5,000 in startup expenses the first year. The rest must be spread out over 15 years.

Legal and Professional Fees

Fees for lawyers, tax pros, or consultants are deductible. If the service benefits future years, spread the deduction across the life of the benefit.

Insurance

You can deduct premiums for business-related insurance, including:

Travel

Business trips? Deduct airfare, car expenses, lodging, meals, and even laundry. If you mix business with pleasure, only the business-related costs are deductible.

Interest

If you borrow for your business, the interest is tax-deductible. But if your profits exceed $25 million, only 30% of interest expenses are deductible under current laws.

Taxes

Yep, what you paid in taxes can reduce your tax burden. Certain taxes are deductible, like:

However, federal income taxes on business profits are not deductible.

Education

Training and education expenses that improve your current business skills are deductible. Just make sure it’s related to your existing work—not a new career.

Advertising and Promotion

Deduct the cost of promoting your business, such as business cards, websites, or even sponsoring local events—if there's a clear link to your business.

20% Pass-Through Deduction

If you run a pass-through business (like a sole proprietorship, partnership, or LLC), you may qualify to deduct up to 20% of your net income. This deduction lasts through 2025.

Employee Expenses

Employee salaries, payroll taxes, and benefits like health insurance are fully deductible.

Independent Contractors

The cost of hiring independent contractors, such as bookkeepers or cleaners, is deductible too.

Home Office

If you work from home, you can deduct a portion of your home expenses, like rent, utilities, and maintenance. The space must be used exclusively for business.

Don’t Miss These Additional Write-Offs

Here are some easy-to-overlook deductions:

Maximizing deductions takes careful planning, but it’s worth it. When in doubt, consult a tax professional to ensure you’re getting every tax break your business deserves.

Advanced Deductions

When it comes to working with a tax professional this year, Don’t leave money on the table by working with someone who doesn’t understand advanced strategies for reducing your tax burden.

Many CPAs don’t understand that it's possible to save outside the standard deductions. What are we talking about? 

Things like tax-loss harvesting can offset gains and reduce tax liability. Charitable giving or even setting up a private nonprofit foundation can also help.

The IRS also provides tax incentives for business investments in fixed assets through Section 179 and Bonus Depreciation deductions. Let’s take a closer look at these.

These two deductions are often applied for manufacturing and real estate companies, but they can be creatively applied to many other businesses as well. 

Bonus depreciation requires applying the deduction across all assets within a particular asset class, whereas Section 179 allows for more selective application on an asset-by-asset basis. 

Both deductions must be taken in the tax year when the asset is placed into service. However, Section 179 allows flexibility to defer part of the expense, while bonus depreciation requires a set percentage to be applied.

Understanding the differences between these deductions helps optimize tax benefits. Let’s take a look.

Section 179

Section 179 gets its name from section 179 of the Internal Revenue Code. It allows business owners to write off the full cost of eligible property in the year it is purchased and put into use instead of deducting the depreciation over time.

Note: You cannot take a 179 deduction on property purchased in a previous year, even if this is the first year you used the property for business purposes.

Section 179 Eligibility

Property eligible for the Section 179 deduction is usually tangible personal property (usually equipment or office furniture) purchased for use in your business. If you use property for both personal and business purposes, you can only use a Section 179 deduction if the asset is used at least 51 percent of the time for business. 

Section 179 Deduction Limitations

The total amount of purchases you can write off changes every time Congress updates IRC section 179 of the tax code. For tax years beginning in 2024, the maximum section 179 expense deduction is $1,220,000. 

Section 179 + S Corp

Using a Section 179 tax deduction with your S Corp means you can deduct the full purchase amount of business equipment from your personal taxable income. Since an S Corp is a pass-through entity, when a Section 179 deduction is personally allocated to you from an S Corp or partnership, the income and expense are “passed through” to you, and you claim it on your individual tax return. 

This means any income you earn from your S Corporation will be reduced by your Section 179 deductions, and you’ll only have to pay taxes on the reduced amount. 

Bonus Depreciation

If you can't write off an asset immediately, you have to depreciate it. You deduct a percentage of the value each year until you've written off the entire cost.

It's also possible that you can take off extra for expenses that exceed the Section 179 limit, the first year as "bonus depreciation." 

Starting in 2024, bonus depreciation rates decreased to 60 percent.

Bonus Depreciation Eligibility

Eligible assets extend to farm buildings and land improvements with a useful life of 1-20 years, including certain real estate improvements.

Bonus Depreciation Deduction Limitations

Unlike Section 179, there’s no business income limit, so it's usable even when reporting a business loss.

Combining Section 179 and Bonus Depreciation

You can use both Section 179 and bonus depreciation, especially when near the Section 179 deduction limits. However, state regulations may differ from federal rules, so be mindful of potential complications when filing state tax returns.

By strategically using Section 179 and bonus depreciation, business owners can effectively manage their tax liabilities while maximizing deductions on qualifying assets.

What’s New for Advanced Deductions … According to the Internal Revenue Service



Section 179 deduction dollar limits. For tax years beginning in 2024, the maximum section 179 expense deduction is $1,220,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $3,050,000.Also, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2024 is $30,500.

Phase down of special depreciation allowance. The special depreciation allowance is 60% for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2023, and before January 1, 2025 (other than certain property with a long production period and certain aircraft). Property with a long production period and certain aircraft placed in service after December 31, 2023 and before January 1, 2025 is eligible for a special depreciation allowance of 80% of the depreciable basis of the property. The special depreciation allowance is also 60% for certain specified plants bearing fruits and nuts planted or grafted after December 31, 2023 and before January 1, 2025.

—(Source Also see Certain Qualified Property Acquired After September 27, 2017 and Certain Plants Bearing Fruits and Nuts under What Is Qualified Property?)

Get Help, Get Results

Remember: Staying informed about the latest tax changes is crucial to avoid costly mistakes. The choices you make for your business this year will directly impact your tax obligations next year. 

The right tax professionals can help you navigate complex regulations, maximize tax benefits, and align with current tax laws. 

Lower level CPAs may not even know it's possible to save outside the standard deductions, and even more competent CPAs tend to only know about S-Corporations and real estate investing.

What you want is a CPA who earns a high income, just like you, and who has found a way to pay nearly $0 in tax by leveraging advanced strategies. It's even better if they have an MBA and can perform Chief Financial Officer functions. When you work with a CPA at that level, you’ll find lots of ways to save on tax, even if you're a W2 employee (or active 1099) with zero investment experience.

In turn, that improves your cash flow and gives you more cash to reinvest in your business's success and in your long-term strategy for building generational wealth.

2025 IRS Code Updates: Opportunities for the 2024 Tax Year

Let's face it, paying taxes stinks. 

No one likes to think about tax code updates, but the fact is the 2025 tax season is here, things have changed, and you can’t avoid it! 

Failing to plan is planning to fail is a cliche, sure, but it’s the truth. If you don’t work with someone who is familiar with the tax code updates, you’ll leave money on the table now that tax season is rearing its ugly head again. 

There were several tax code updates for the 2024 tax year that W2 (or active 1099) workers and business owners need to know about . 

To help you navigate the murky waters of the 2025 tax season, we compiled a list of the four most important tax code updates from that session. 

Work with your CPA who knows about advanced strategies. Someone with an MBA who can perform Chief Financial Officer functions.  With their help and the information below, you’ll navigate complex tax decisions and make building your financial future seem easy.

#1 Tax Code Updates On Income Brackets

How much you pay in taxes depends on your income and your filing status ( whether you’re single, married, or filing jointly). 

Your income isn’t taxed at a single, flat rate. Instead, it’s divided into tax brackets. You may pay several different tax rates on various parts of your earnings.

The 2024 tax brackets apply to income earned last year (what you’ll report on tax returns filed in 2025):

Tax rateSingle Taxable IncomeMarried Filing Jointly Taxable IncomeMarried Filing Separately Taxable IncomeHead of Household Taxable Income
10%Up to $11,600Up to  $23,200Up to  $11,600Up to  $16,550
12%$11,601 to $47,150$23,201 to $94,300$11,601 to $47,150$16,551 to $63,100
22%$47,151 to $100,525$94,301 to $201,050$47,151 to $100,525$63,101 to $100,500
24%$100,526 to $191,950$201,051 to $383,900$100,526 to $191,950$100,501 to $191,950
32%$191,951 to $243,725$383,901 to $487,450$191,951 to $243,725$191,951 to $243,700
35%$243,726 to $609,350$487,451 to $731,200$243,726 to $365,600$243,701 to $609,350
37%$609,351 or more$731,201 or more$365,601 or more$609,351 or more

#2 Standard Deductions Increase For Everyone

The standard deduction allows you to save money on taxes by reducing your taxable income. The standard deduction for married couples filing jointly for tax year 2024 increased to $29,200, $1,500 more than tax year 2023. 

For single taxpayers and married individuals filing separately, the standard deduction is $14,600 for 2024, an increase of $750 from the previous year.

For heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100.

You can also leverage standard deductions by paying your children to work for you (up to the standard deduction amount). Here are some general rules that you should follow if you have children who can work for you: 

Read our article Hiring Your Children Has Monumental Benefits: Decrease Taxes, Increase Profits. It gives you an in-depth look at how you can hire your children, claim an expense for your business, and keep your wealth within your family. 

#3 Safeguard Your Health And Money With HSA Contributions

You can reduce your taxable income by contributing to a health savings account. This account helps you pay for medical expenses. 

The deductible contribution increased to $3,650 from $3,600 for a single person. For families, the HSA deductible went to $7,200 from $7,300. 

Health Savings Accounts (HSAs) are a smart way to save money for medical expenses. Why? Because the money you put in—and use for qualified medical costs—is tax-free.

Before contributing to an HSA, you must meet these requirements:

  1. You’re enrolled in an HSA-eligible health plan.
    • For 2024, this means:
      • A deductible of at least $1,600 (self-only) or $3,200 (family)
      • An out-of-pocket max no higher than $8,050 (self-only) or $16,100 (family)
  2. You don’t have conflicting coverage.
    • This includes non-HSA-eligible health plans or a full-purpose health care Flexible Spending Account (FSA).
  3. You’re not enrolled in Medicare.
  4. You’re not claimed as a dependent on someone else’s tax return.

One more “catch”: You can’t contribute unlimited amounts. The IRS sets a cap on how much you can contribute to your HSA. This limit includes contributions made by both you and your employer.

For example, if your 2024 HSA limit is $4,150 and your employer adds $1,000, you can only contribute $3,150. However, if you’re 55 or older, you can also make an extra $1,000 catch-up contribution.

2024 HSA Contribution Limits

Here’s what determines how much you can contribute:

#4 Tax Code Updates Means More Money For Your Family  

The 2024 lifetime estate and gift tax exemption surged from $12.92 million to $13.61 million (double for married couples). This shields most people from having to pay federal gift tax.

But if you DO have to pay … For 2024, the annual gift tax limit is $18,000. ( up $1,000 from 2023 since the gift tax is one of many tax amounts adjusted annually for inflation.)

That means you can give your child $18,000 (or $36,000 for couples) to each child, grandchild, or person without filing taxes on the gift.

Key Takeaways

No one wants to think about paying taxes before taxes are due. But, you should plan to keep more money in your pocket and out of Uncle Sam's coffers. 

To hold onto your nest, you must stay abreast of the tax code updates that may affect you in 2025. 

Some critical updates that may affect you as a real estate investor include the changes to:

Tax, Investing, and Legal Strategies for Medical Professionals

High-earning medical professionals eventually learn a hard lesson:

The more they earn, the more they pay in income taxes.

And since physicians and other medical professionals rank among some of the highest-paid individuals in the United States, they need tax planning and investment strategies that will protect their assets and build real generational wealth they can pass to their children and grandchildren.

Hard-working doctors and other healthcare pros can take advantage of all the tax deductions, tax credits and tax exemptions that Congress and the Internal Revenue Service (IRS) make possible to reduce their taxable income.

But there are also lesser-known strategies which, when leveraged correctly, can reduce your tax burden and deliver a sound financial plan that gives you what we call “time freedom.”

These include:



✅️ Setting up an S-Corporation and a Solo 401(K)
✅️ Setting up a 501(C)3 Non-Profit Private Foundation and investing in cash flow deals 
✅️ Investing your tax savings in Short-Term Rentals or syndication deals that offer bonus depreciation

Here I’ll introduce some of the tax, investing and legal strategies our medical professional clients use.

Tax Strategies for Medical Professionals

As a busy healthcare professional, you work hard to provide quality care to your patients, juggle administrative work, and balance your work with life and demands at home. 

That’s why working to optimize your tax situation is probably not at the top of your priorities.

Deep down, however, you know that tax planning should be a key component of your wealth management strategy.

If you are employed by a hospital, a private practice, or a government healthcare department, you’re probably a W2 worker. W2 employees are taxed on gross income first, meaning the IRS takes their cut before you receive your paycheck.

But if you’re a business owner or investor (with the correct structures in place), you can pay the IRS quarterly on your net income after expenses. 

To put it another way, when investing through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes. 

If you’re like most of our clients, you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs. 

This simply isn’t true.

That’s why finding the right CPA to work with is so crucial. You need someone who knows what they’re talking about. It's important to understand there are different tiers of CPAs:

Many CPAs don’t understand that it's possible to save outside the standard deductions. A high-level CPA is someone who earns a high income themselves, someone who has personally found a way to pay nearly $0 in tax by leveraging advanced strategies. 

The right CPA helps our medical professional clients achieve and maintain tax rates in the 0-10% range. This accelerates your overall cash flow and net worth.

If you find a CPA with an MBA and who can perform Chief Financial Officer functions, even better— these folks will be able to help you navigate complex tax decisions and make it seem easy.

When you work with that level of CPA, you'll start to find creative (but completely legal) ways to save taxes, even if you're a medical professional with zero investment experience. And that savings can be invested in equally creative, equally overlooked ways.

Such as …

Investing Strategies For Medical Professionals

The median wage for medical professionals (everything from dental hygienists, physicians and surgeons, to registered nurses) was $80,820 in 2023—much higher than the median annual wage (for all occupations) of $48,060. (Source)

However, at a certain point these high-salary professionals realize they need to take steps to shelter their income from overtaxation. And while saving money on tax is important, but the real magic happens once our medical professionals start re-investing those tax savings into tax advantaged deals.

These include:

Private Foundations

A Private Foundation is a self-funded nonprofit organization that shelters income, allowing you to bypass traditional capital gains tax and take advantage of a much lower excise tax rate.

When using the Private Foundation for income sheltering and high-performance investments, the compounding effect can lead to much better returns than traditional investing.

The Private Foundation can even  replace your W2 income with a director’s salary for managing the Foundation.

Depreciation Deals

Bonus depreciation is a tax incentive designed to stimulate business investment by allowing investors to accelerate the depreciation of qualifying assets, such as equipment, rather than write them off over the useful life of the asset. This strategy can reduce a company's income tax, which in turn reduces its tax liability.

Medical professionals can claim accelerated bonus depreciation as a limited partner when investing passively into a real estate syndication. As a limited partner (LP) passive investor, you get a share of the returns based on how much you invest. 

Similarly, you get a share of the tax benefits as well, as documented by the Schedule K-1 you would receive each year. The K-1 shows your income for a particular asset. In many cases, particularly in the first year of the investment, that K-1 can show a loss instead of an income.

The magic of the K-1 is that it includes accelerated and bonus depreciation. In other words, even while you’re receiving cash flow distributions, the K-1 can show a paper loss, which in most cases means you can defer or reduce taxes owed on the cash flow you’ve received.

Cash Flow Deals

These deals don't offer tax benefits, but can generate so much income that they outperform potential tax savings. Investments in this category include things like algorithmic trading. You can invest in cash flow deals through a tax shelter, such as your Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.

Legal Strategies For Medical Professionals

Estate planning is something everybody needs to do at some point. Lawsuits can happen to anyone, and high-net-worth medical professionals are especially at risk. All it takes is a car accident, an injury on your property, a contractual disagreement—and once somebody knows what you own, they can hire a good attorney to force you to settle out of court. 

The way you protect yourself is to set up asset protection. Holding companies can shield anything of value, such as real estate properties and investments. Operating companies can be established for  business activities like collecting rent, paying contractors, and signing contracts.

Trusts are a way to guarantee anonymity across all of your entities and assets. They allow you to look like a beggar on paper and transfer your assets anonymously to your heirs, taking the target off your back.

Here are a couple of other legal structures we help our clients set up:

S Corporations

Independent doctors or physicians can create S Corporations to handle their taxes. Unlike regular corporations (where profits get taxed twice), S corporations pass their income, losses, and deductions directly to their owners. An S Corp, or S corporation, is a “pass-through” entity, which means that the profits and losses of the business are passed through to the individual owners and are taxed at the owners’ personal income tax rates. 

Instead of paying corporate taxes, each owner reports their share of the business’s money on their personal tax returns, paying taxes at their individual rates.

Solo 401(K)

What about retirement?

If you are a medical practitioner who works as an independent contractor, The Solo 401(k) is an ideal retirement plan because it lowers your taxable income and enables you to build up retirement funds through high contribution limits and almost limitless investment capability. 

The Solo 401(k) is a qualified retirement plan, just like hospital-sponsored plans. You can contribute to the plan on a tax-deferred basis. You can also contribute Roth funds to the plan and invest tax-free. With some of the highest contribution limits, the Solo 401(K) lets medical professionals lower their taxable income and grow their retirement quickly. 

To Wrap It Up …

Even medical professionals with no investments need entity structuring. Here is what a full legal diagram could look like, which includes asset protection structures, estate planning, and tax shelters.

As you accelerate your tax and investing approach, it's important to add in measures to prevent a catastrophic reset. We can show you how to save $20k or more in taxes during the first year, but you will want to set up additional tax and legal structures over time to continue to reduce your taxes down to the 0-10% range. 

Without entities, this would be impossible.

It's also important to protect yourself from catastrophic events, no matter how unlikely, so that you don't have any major setbacks on your journey to time and financial freedom.

Tax, Investing, and Legal Strategies for Tech Professionals

Tech industry professionals thrive on innovation, cutting-edge technology, and rapid growth.

However, navigating the world of personal finance requires a different set of skills. 

Whether they're W2 employees or entrepreneurs, experienced tech professionals can earn lucrative compensation packages, which unfortunately means significant tax liabilities. That’s why they have to optimize tax strategies and get professional help navigating complex tax laws. 

Or if they own a business or have exited a business, our capital gains page can help (if they made a ton of money in their exit and are looking for tax strategies to offset that).

The unique financial challenges faced by tech workers call for tailored tax, investing and legal strategies to help you make the most of your wealth. These include:


✅️ Investing in cash flow deals (like algorithmic trading).
✅️ Creating a 501(C)3 Non-Profit Private Foundation to shelter up to 30% of your income
✅️ Setting up an S-Corporation for any side gigs and leverage the Augusta Rule

Navigating the world of taxes can be daunting, especially for tech workers with complex compensation packages, stock options, and freelance gigs. With the right strategies, however, you can make an informed decision about the best steps to take to secure your financial future.

Let’s get started.

Tax Planning for Tech Professionals

Equity compensation, a high income, remote work (where your employer is in another state with different laws) … These can make tax planning for tech professionals quite complex.

You have to take a lot into account.

Different types of equity compensation have different tax treatments. For example, Restricted Stock Units (RSUs) are taxed as ordinary income upon vesting. Incentive Stock Options (ISOs) may qualify for preferential tax treatment if certain holding periods are met. Non-Qualified Stock Options (NSOs) are taxed as ordinary income upon exercise. But exercising ISOs can trigger Alternative Minimum Tax (AMT) liability.

Lost yet? It can get pretty confusing very quickly.

I believe a solid wealth management strategy starts with tax planning. Remember: salaried (full-time) tech workers are taxed on gross income first, with the IRS taking their cut before you receive your paycheck.

Compare this to business owners and investors (with the correct structures in place), who pay the IRS quarterly on their net income after expenses. 

When you (as a full-time employee) invest through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes. 

Tech professionals early in their careers may benefit from Roth conversion strategies, paying taxes now on traditional retirement accounts to enjoy tax-free growth and withdrawals in the future. This isn't nearly as strong as the foundation or depreciation deals, however.

But if you’re like most of our clients, you’re further along in your career, making a good salary, and you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs. 

High earners in the tech field spend years growing their career and growing their income. The more they make, the more it hurts to see 20-30% of earnings yanked away by the IRS.

I have good news for you: The right CPA can show you how to layer tax strategies to dramatically cut your taxes and even reach the 0-10% range, depending on how aggressive you decide to go.

(Here's the catch: To achieve 0-10%, you actually have to implement all the tax strategies. That's like eating your veggies, nobody wants to do it.)

Many CPAs don’t understand that it's possible to save outside the standard deductions. Things like tax-loss harvesting can offset gains and reduce tax liability. Charitable giving or even setting up a private nonprofit foundation can also help.

A high-level CPA will be able to help you navigate complex tax decisions and make it seem easy. They can find creative (but completely legal) ways to save taxes. And that savings can be invested in equally creative, equally overlooked ways.

Such as …

Investing Strategies For Tech Professionals

After implementing all the best tax strategies, our tech clients then focus on investing their tax savings into tax-advantaged deals. There are tons of deal types, but there are two categories of investments you really need to know about:

Tech pros need to know about e three "financial freedom" strategies they can avail themself of:

The first two are short-term strategies. You can save taxes with Royal Legal's tax strategies (and you may still use a foundation, but only as one of many tools to capture tax savings) and you can generate cash flow with something like algorithmic trading.

Creating a nest egg requires a longer-term strategy. Putting money into your own foundation, THEN investing in cash flow deals is the strongest possible move—as long as you don't want to have a bunch of cash on hand. Because once it's in the Foundation, it's no longer yours. We endorse this strategy because that's the best possible move for anybody interested in achieving financial freedom.

Legal Strategies For Tech Professionals

Software executives, Saas founders, and other tech professionals have giant targets on their back when it comes to frivolous lawsuits.

All it takes is a car accident, an injury on your property, or a contractual disagreement—and once somebody knows what you own, they can hire a good attorney to pressure you until you settle out of court. 

The way you prevent this is to set up asset protection before you get sued.

Anonymity across all of your entities and assets is key. Holding companies are where you should place your assets. This could be things like real estate properties or other investments. Anything of value that could be exposed during a lawsuit is important to protect. Operating companies run everything.

So here's what you'll be doing:

#1. Set Up a Holding Company

This is what "holds assets," typically anonymously. There are three kinds:

#3. Set Up an Operating Company

This is what does your "operations." Collecting rent, paying bills, performing key functions and transactions. This is what turns into the S-Corp because the money is flowing through (but not held inside for very long) this entity, which allows us to apply tax strategies to it.

In this case, you are mixing both. So you would want to differentiate…

Entity structuring means creating LLCs so your assets are held anonymously and separate from your high risk business transactions. We recommend a holding company for any investments or assets. Then a separate operating company for business transactions, such as your consulting side gig. When the operating company reaches $75k/year income, you should turn it into an S-Corp. etc…

PS - The $75k range (sometimes as low as $50k) is basically where you start to save money on taxes.

The reason it takes until then is that the S-Corporation requires a separate tax return and payroll, which both cost money in the $1-2k range. So it doesn't really pay for itself until a certain income threshold.

Unlike C Corps (that face corporate taxes and then shareholder taxes on dividends), S Corps allow shareholders to pay taxes only at their individual income tax rates, simplifying the process. S Corps split profits into wages and distributive shares, the latter of which is not subject to self-employment taxes. This distinction can provide considerable savings on the Social Security and Medicare tax burden.

We’ll also help you employ different types of trusts to create anonymity at the County Recorder and Secretary of State offices, as well as during probate (so you look like a beggar on paper and can transfer your assets anonymously to your heirs).

My team can show you how to save $20k or more in taxes during the first year, and additional tax and legal structures will  continue to reduce your taxes down to the 0-10% range. Without entities, this would be impossible.

Here’s a 20-year forecast that shows how the right combination of tax strategies, investing and corporate entity structure can grow your wealth:

Protect yourself from lawsuits with estate planning, no matter how unlikely you think they are, so that you don't have any major setbacks on your journey to time and financial freedom.

The Path From High Tech To Financial Freedom

You’ve worked hard your entire life. It’s time to gain control over your time and money. Rapidly achieving true freedom requires a good tax and investment strategy.

We help tech executives and other professionals in the digital space save $20k or more in taxes during the first year—then re-invest that tax savings into turnkey properties, ATMs, self-storage syndications, apartment complex rehabs and more. We help them create the right tax and legal structures to continue to reduce your taxes and create true anonymity to protect their money.

In the end, we can help you:

Tax, Investing, and Legal Strategies for W2 Employees

Not-so-fun fact: As a W2 employee, you are taxed at a rate higher than businesses and investors.

In fact, no group in America pays more taxes than high-salary wage-earning W2 employees. 

Whether you are a medical professional, a tech professional or any other full-time employee for a U.S. company, there are some little-known ways you can jumpstart your tax savings and investment journey.

They include:


✅️ Setting up a 501(C)3 nonprofit Private Foundation and invest in high-performance depreciation and cash flow deals
✅️ Finding general partner investment opportunities in energy and machinery to get bonus depreciation
✅️ Investing in Short-Term Rentals and using Cost Segregation and the STR Loophole

Let’s take a look at these tax, investing and legal strategies for 9-to-5’ers so you can make an informed decision about the best steps to take to secure your financial future.

Tax Strategies for W2 Employees

Tax planning is a key component of a solid wealth management strategy. Remember: W2 employees are taxed on gross income first, with the IRS taking a portion before you receive your paycheck.

In contrast, business owners and investors (with the correct structures in place) pay the IRS quarterly on their net income after expenses. 

When you (as a full-time employee) invest through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes. 

If you’re like most of our clients, you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs. That’s why finding the right CPA to work with is so crucial. You need someone who knows what they’re talking about.

The right CPA can help W2 earners leverage tax strategies to achieve and maintain tax rates in the 0-10% range. This accelerates your overall cash flow and net worth.

Many CPAs don’t understand that it's possible to save outside the standard deductions. A high-level CPA is someone who earns a high income themselves, someone who has personally found a way to pay nearly $0 in tax by leveraging advanced strategies. 

If you find a CPA with an MBA and who can perform Chief Financial Officer functions, even better— these folks will be able to help you navigate complex tax decisions and make it seem easy.

When you work with that level of CPA, you'll start to find creative (but completely legal) ways to save taxes. And that savings can be invested in equally creative, equally overlooked ways.

Such as …

Investing Strategies For W2 Employees

W2 employees spend years growing their career and growing their income. At a certain point we have plenty of income but 20-30 percent of it is being sucked away by the IRS.

Saving money on tax is important, but the real magic happens once W2 earners invest their tax savings into tax-advantaged deals.

There are tons of deal types, but the top asset classes include real estate, syndications in energy or machinery, and algorithmic trading. In short, deals can do three things:

In general, there are two categories of investments you should be looking at...

Depreciation Deals

Cash Flow Deals

These deals don't offer tax benefits, but can drive so much income that they outperform the tax savings. Investments in this category include things like:

One of the top strategies is to invest in cash flow deals through a tax shelter, such as a 501(C)3 Non-Profit Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.

You see, there are three "financial freedom" strategies at a high level:

  1. Save on taxes (typically this year)
  2. Generate more cash flow (typically this year)
  3. Create a nest egg so you can retire as fast as possible

#1 and #2 are short-term strategies. You can accomplish #1 with Royal Legal's tax strategies (and you may still use a foundation, but only as one of many tools to capture tax savings) and you can accomplish #2 with a good cash flow deal (algorithmic trading, for example).

#3 is a longer-term strategy. Putting money into your own foundation, THEN investing in cash flow deals is the strongest possible move—as long as you don't want to have a bunch of cash on hand. Because once it's in the Foundation, it's no longer yours.

So when we endorse this strategy, it's because that's the best possible move for anybody interested in #3 - achieving financial freedom.

Legal Strategies For W2 Employees

As you accelerate your tax and investment approach, it's important to incorporate asset protection and legal strategies into your plan. The Royal Legal approach for W2 earners lets you:

Even a W2 employee with no investments needs to set up legal support. Everybody needs an estate plan, not just for their kids but also in case they become incapacitated and need someone to help make medical and financial decisions (ex: car accident, COVID, etc...).

Setting up an LLC, even as a small consulting or investing firm, can give you options to a big range of new strategies.

Once your LLC hits the $50-75k income mark, the S-Corp election becomes your best friend.  S Corps utilize pass-through taxation, meaning income and losses "pass through" the company directly to the shareholders. 

Unlike C Corps (which have corporate taxes and then shareholder taxes on dividends), S Corps allow shareholders to pay taxes only at their individual income tax rates, simplifying the process.

For businesses generating between $75,000 and $250,000 in profits per owner, electing S-Corp status can offer significant savings. While LLCs face self-employment taxes on all profits, S-Corps split profits into wages and distributive shares, the latter of which is not subject to self-employment taxes. This distinction can provide considerable savings on the Social Security and Medicare tax burden.

The S Corps elections also means you can write off business expenses such as equipment, work meals, travel and more. For example, you can depreciate vehicles—80% if under 6,000 lbs or 100% if over 6,000 lbs.

You can even pay your kids to work, typically up to around $14k/year. They avoid income tax and you avoid having profit taxed at your normal income tax rate. Win/win!

There’s a Path to True Financial Freedom For W2 Employees

You’ve worked hard your entire life. It’s time to gain control over your time and money. Rapidly achieving true freedom requires a good tax and investment strategy.

We can show full-time, W2 workers how to save $20k or more in taxes during the first year. Then we give you access to high performance deals and model out different investment options so you can see the best path to rapidly achieve your financial goals.

The Private Foundation. Oil & gas syndications. Machinery deals. And short-term rentals. These are your best options as a W2. The list of deals that outperform traditional stock market investments (and sometimes provide additional tax benefits) is long.

Take a look at a typical 20-year plan that includes asset protection structures, estate planning, investing and tax shelters:

Kamala Harris Capital Gains Tax: Changes To Expect (Jan. 2025 Update: Well, That Didn't Happen!)

Jan. 2025 Update: Well, the U.S. Election went the other way. Whatever your feelings about it, here are some things to expect from the incoming Trump administration regarding capital gains:

Donald Trump wants to make the tax cuts in his 2017 tax law permanent and lower federal income tax rates for individuals. Trump hasn't said much about long-term capital gains tax, although he floated the idea of a temporary capital-gains tax holiday.

Project 2025, designed for the next Republican administration and spearheaded by the Heritage Foundation, suggests two changes to the capital gains tax. First, the plan calls for a 15% top long-term capital gains tax rate, down from 20% now.

Project 2025 supports the idea of indexing capital gains for inflation each year, meaning taxpayers would be able to increase their tax basis in capital assets by the rate of inflation between the purchase date and time of sale.

Here's an example from Kiplinger: If you bought stock in 2010 for $10,000 and sold it in January 2024 for $35,000, you would have a $25,000 long-term capital gain ($35,000 - $10,000).

This is not including inflation indexing. With indexing, your tax basis in the stock would jump to $13,740, making your capital gain $21,260 ($35,000 - $13,740), lowering your tax bill.

Indexing capital gains involves several factors that individuals and investors need to be aware of:

  • Using the appropriate inflation index
  • Tax basis isn't always static for investments such as reinvested dividends, so the calculation can get complicated
  • Higher-income individuals stand to benefit the most

Original Article below ....

Despite campaign promises, Congress changes the tax code—not the president.

And given the current political climate, we can expect legislative debate when the Tax Cuts and Jobs Act sunsets at the end of 2025.

Still, Kamala Harris has supports changing the way capital gains are taxed, so I’d like to talk about how those changes affect us as investors.

As a reminder, capital gains tax is applied to the profit earned when an asset, such as stocks or property, is sold at a higher price than it was originally purchased. This tax primarily affects middle- to high-income earners who have investments in various assets. 

Under current tax policies, capital gains are taxed only when gains are "realized" — that is, when the asset is sold and the profit is confirmed.

For American W2 employees and 1099 earners with high incomes, this tax represents a critical component of financial planning. Avoiding a significant tax bill when liquidating assets is crucial to building and preserving wealth.

Expected Capital Gains Tax Rates for 2025

Under Kamala Harris’s tax proposals, the capital gains tax landscape will shift substantially for high-income earners. A new long-term capital gains rate of 28% could apply to individuals earning over $1 million annually. This adjustment is a significant increase from the current top rate of 20%, making it more important than ever for high-income earners to understand how to use legal structures to protect their assets. 

Harris's Broader Economic Goals and Tax Policy Objectives

Harris’s tax policy proposals aim to generate revenue for social programs, promote wealth redistribution, and stimulate the economy for low- to middle-income families. These objectives are part of a larger fiscal policy effort to address wealth inequality and expand benefits for working families.

To fund these initiatives, the plan includes raising corporate and high-income individual taxes. The proposed policies align with Harris’s broader economic vision of using tax policy as a tool to level the economic playing field while still promoting growth through targeted credits and exemptions.

Key Capital Gains Tax Changes for High-Income Earners

Increased Taxes on Capital Gains for the Wealthiest

For those with an annual income over $1 million, the proposed capital gains tax rate would rise to 28%, marking one of the highest rates in recent history. This change would specifically impact high-income households, making it important for these earners to plan around the new rate. Harris also supports raising the net investment income tax (NIIT) from 3.8% to 5% for top earners, increasing the overall tax burden on investment income.

Introduction of a Minimum Tax on High-Net-Worth Individuals

A significant component of Harris’s proposal includes a 25% minimum tax on ultra-high-net-worth individuals with over $100 million in assets, covering both realized and unrealized gains. This policy focuses on wealth accumulation that may otherwise escape taxation under traditional income tax structures. While some experts express concerns about the technical aspects of taxing unrealized gains, Harris argues it is a necessary step toward addressing economic inequality.

Corporate and Business Tax Adjustments

The Harris tax plan also targets corporate taxation. Her proposal includes raising the corporate income tax rate, increasing taxes on stock buybacks, and expanding global intangible low-taxed income (GILTI) regulations. These measures aim to ensure that corporations contribute their fair share, offsetting the high-income earners’ tax relief while preventing tax avoidance by companies with substantial foreign earnings.

These changes could indirectly affect high-income individuals who rely on dividend-paying investments. Understanding the full impact on corporate taxation is key for those in high income brackets, as adjustments could influence corporate profits, stock valuations, and, consequently, the value of investment portfolios.

Changes in Inheritance and Estate Tax Policies

Harris proposes changes to the treatment of unrealized gains upon inheritance. The current “step-up in basis” provision, which allows inherited assets to be valued at their current market price (thus avoiding capital gains tax), would be adjusted. 

Under the Harris plan, unrealized gains would be subject to taxation at the time of inheritance, potentially reducing the wealth passed down and increasing tax liabilities for beneficiaries.

For estate planning purposes, high-net-worth individuals may need to reassess how they transfer assets to future generations. The policy is aimed at ensuring that large estates contribute more in taxes, though it includes exemptions for smaller estates.

Expanded Tax Credits and Social Incentives

Aside from changes to the way capital gains are taxed, Harris is proposing the following tax changes:

Increased Child Tax Credit (CTC)

Harris plans to expand the Child Tax Credit (CTC), particularly for families with newborns. This increase is part of a broader effort to support low- and middle-income families. For high-income earners with children, these expansions could provide additional tax benefits.

Permanent Earned Income Tax Credit (EITC) Expansion

Harris proposes a permanent expansion of the Earned Income Tax Credit (EITC), which primarily benefits low-income workers, particularly those without children. While this credit is not targeted at high-income earners, it represents a shift toward policies that support economic security for a broader population.

First-Time Homebuyer Credit

A tax credit for first-time homebuyers is also on the table, aimed at assisting new homeowners in building equity and long-term wealth. This incentive aligns with Harris’s broader economic goals by enabling more Americans to build financial security through homeownership.

Projected Economic and Revenue Impact of the Harris Plan

Nobody has a crystal ball, but we can make some educated guesses about how these changes might affect our investment strategies as well as the economy overall:

Economic Growth Concerns

The proposed increases in capital gains and corporate taxes may slow economic growth in the short term. Economists project a possible decrease in GDP and employment as a result of higher costs for businesses. However, Harris’s team argues that the benefits of redistributing wealth and funding social programs will outweigh these impacts over time.

Revenue Projections and Impact on National Debt

Harris’s tax plan is projected to generate $4.1 trillion in revenue over a decade, even after accounting for various tax credits. This revenue is critical for funding the proposed social programs and reducing the federal deficit. However, the expected economic slowdown could partially offset these revenue gains, resulting in a net revenue increase of approximately $642 billion over ten years.

Challenges and Criticisms of Harris’s Capital Gains Tax Proposal

Some critics argue that higher capital gains and corporate tax rates could reduce the U.S.’s global economic competitiveness. Increased taxes on corporations could lead some companies to relocate or adjust their structures to mitigate tax impacts. This potential decrease in competitiveness is a concern for both policymakers and high-income earners who rely on corporate investment returns.

The introduction of new taxes, including those on unrealized gains, make an already intricate tax code even more of a headache. High-income individuals may face increased compliance costs and administrative burdens. 

Those in high-income brackets will need to work closely with tax professionals to ensure compliance and optimize tax strategies.

Harris’s plan aims to reduce the federal deficit, but the projected economic slowdown and potential job losses could undermine these goals. Balancing revenue generation with economic stability remains a challenge, and it is uncertain how these policies will affect the deficit long-term.

Capital Gains Tax Strategies for High-Income Earners

Offsetting Gains with Losses

One of the most effective strategies for managing capital gains tax is to offset gains with losses. High-income earners can strategically sell underperforming assets to offset gains, reducing their tax liability. This approach is known as tax-loss harvesting and can be especially beneficial under higher capital gains rates.

Leveraging Tax-Advantaged Accounts

Using tax-advantaged retirement accounts like IRAs and 401(k)s can defer or minimize capital gains tax. By holding investments within these accounts, you can avoid immediate capital gains taxes, allowing your investments to grow tax-free or tax-deferred until retirement.

Working with Financial Professionals

Navigating these new tax policies will require careful planning. High-income earners should consult with tax professionals to identify the best strategies for minimizing capital gains taxes and maximizing after-tax returns. 

Proper planning can help you align your investment strategy with your financial goals while staying compliant with evolving tax laws.

Conclusion: Harris’s Balance Between Revenue and Economic Growth

Kamala Harris’s capital gains tax proposal represents a significant shift in how investment income could be taxed in the future. By targeting ultra-high earners and large estates, her plan seeks to balance revenue generation with social equity. However, these changes introduce new complexities and challenges for high-income earners.

As the 2024 election approaches, understanding these potential tax changes is crucial for those seeking financial freedom and long-term wealth. With careful planning and a proactive approach, high-income earners can adjust their strategies to adapt to the new tax landscape.

Advanced Tax Savings Strategies for W2 Earners: Cash Flow & Depreciation Deals

For high-income W2 earners, Cash Flow Deals and Depreciation Deals are powerful tools to maximize tax savings, supplement income, and build wealth.

You need to make an informed decision about your path to financial freedom. So let’s get things going ….

Cash Flow Deals: Steady Income and Tax Benefits

“Cash flow deals” are investments that provide regular income. 

“Duh,” right?

But here’s the thing to know: They don’t inherently provide tax benefits. 

That said, when they are used in conjunction with a Private Foundation, they can become highly effective. This strategy is ideal for those looking to replace active income with passive streams, leveraging the Private Foundation to shelter earnings and grow wealth

Royal Legal Solutions helps you navigate these strategies to decrease your tax burden. We’ll show you how to use them in tandem. Once we set everything up, the foundation gives you initial tax savings, while cash flow deals give you high-yield returns (and no capital gains tax).

Cash flow investments are awesome for W2 earners looking to ditch their full-time jobs or generate passive income. These deals include heavy machinery, forex trading, and algorithmic trading. 

A $100k investment in a cash flow deal could potentially return $30k annually, paid out in installments..

Depreciation Deals: Reducing Taxes and Building Wealth Efficiently

Depreciation deals leverage investments that allow accelerated bonus depreciation, reducing taxable income immediately. These deals come in different types:

Depreciation deals offer substantial tax savings and help build net worth, making them a strategic option for those needing to offset high W2 income. Typically, these investments are held in your personal name to take full advantage of the depreciation benefits.

Balancing Cash Flow and Depreciation for Optimal Tax Savings

The best approach often depends on your financial goals:

To maximize savings, it is often recommended to max-fund a Private Foundation first and then explore additional investments in cash flow and depreciation deals for layered benefits.

Finding the Right Mix For You

The right blend of cash flow and depreciation deals depends on your financial goals and tax situation. By leveraging these strategies, W2 earners can significantly reduce taxes, build wealth efficiently, and create a pathway to financial freedom. 

Consulting with a financial advisor or tax professional can help tailor the right mix of investments to meet your specific needs and objectives. Royal Legal Solutions will help maximize your tax savings and investment ROI. We do that by modeling scenarios, forecasting how different types of investments can impact your bottom line. 

Royal Legal does not offer, underwrite, or recommend deals, operators, or deal clubs. We do not take a cut or get a kickback from any third-party deals.

Our clients are responsible for underwriting their own deals and investing their own money. YOU are responsible for deciding which strategies to implement. We provide access to a curated list of deal clubs and investment opportunities, but you are still responsible for your own due diligence.

Have questions? We’ve got answers. But first we’ll need to learn about  your situation and goals. We will help you model how different types of tax shelters and investment options impact your bottom line, and from there you can decide what best fits into your lifestyle.

Comparing Section 179 and Bonus Depreciation for Asset Deductions

The IRS provides tax incentives for business investments in fixed assets through Section 179 and Bonus Depreciation deductions. 

These two deductions are often applied for manufacturing and real estate companies, but they can be creatively applied to many other businesses as well.  

Understanding the differences between these deductions helps optimize tax benefits. Let’s take a look.

Eligible Assets

Bonus depreciation requires applying the deduction across all assets within a particular asset class, whereas Section 179 allows for more selective application on an asset-by-asset basis.

Annual Deduction Limits

Deduction Timeline

Both deductions must be taken in the tax year when the asset is placed into service. However, Section 179 allows flexibility to defer part of the expense, while bonus depreciation requires a set percentage to be applied.

Special Considerations for Listed Property

Listed property (used over 50% for business purposes) has specific deduction limits. For vehicles under 6,000 pounds, the maximum Section 179 deduction is $12,200, and bonus depreciation adds up to $8,000, totaling $20,200.

Deciding Between Section 179 and Bonus Depreciation

Combining Both Deductions

You can use both Section 179 and bonus depreciation, especially when near the Section 179 deduction limits. However, state regulations may differ from federal rules, so be mindful of potential complications when filing state tax returns.

By strategically using Section 179 and bonus depreciation, business owners can effectively manage their tax liabilities while maximizing deductions on qualifying assets.

Case Study: Section 179 Vs. Bonus Depreciation

2023 ExampleSection 179Bonus Depreciation
Net Business Income$1,000,000$1,000,000
Fixed Asset Investments$400,000$400,000
Deduction($400,000)($320,000)**80% of $400K
Taxable Income$600,000$680,000

Your State Matters

Every state is different in how they treat bonus depreciation and Section 179 deductions.With the 2023 example (above), if the investor used the bonus depreciation in Kansas (for example), they would be able to utilize the $320,000 deduction. However, if his equipment was located in California, would only be able to apply a $80,000 deduction ($400,000 spread out over five years). This is because California does not conform with the federal treatment of bonus depreciation and does not allow accelerated bonus depreciation.

How Investors Use Tax-Loss Harvesting to Reduce Their Tax Bills

Tax-loss harvesting (TLH) is a strategy that involves selling investments at a loss to offset capital gains and reduce taxable income. 

We can incorporate the strategy into your personalized plan for financial freedom.  1099 or W2 workers who make more than $150,000 per year and who pay over $20,000 in tax annually can lower their tax bills and optimize portfolio returns. 

By strategically realizing losses, they can improve their overall financial situation and potentially reinvest in assets that align better with their long-term goals.

The Mechanics of Tax-Loss Harvesting

To execute TLH effectively, investors need to understand the basics.

Identifying Losses and Gains: Begin by reviewing your portfolio to identify any investments with losses. The aim is to offset these losses against gains from profitable investments to minimize your tax liability.

Capital Loss Offsets: Losses are used to offset gains on a dollar-for-dollar basis. If capital losses exceed gains, up to $3,000 can be deducted from your ordinary income each year, and any excess can be carried forward to future years.

Short-Term vs. Long-Term Gains/Losses: Gains and losses are categorized as either short-term (held for less than a year) or long-term (held for over a year). Understanding the tax implications of each is crucial, as short-term gains are taxed at a higher rate, similar to ordinary income.

Strategies for Executing Tax-Loss Harvesting

Timing the Sale of Investments: Year-end is a strategic time for tax-loss harvesting, as it allows you to assess your total gains and losses. However, market volatility throughout the year can also provide opportunities to harvest losses.

Tax Implications on Reinvestment: After selling an asset at a loss, reinvest in a similar, but not identical, asset to maintain the desired portfolio balance while still taking advantage of the tax benefit.

Avoiding the Wash-Sale Rule: To prevent abuse, the IRS enforces the wash-sale rule, which disallows repurchasing the same or substantially identical security within 30 days of the sale. To avoid this, investors should carefully plan their sales and subsequent purchases.

Optimizing Tax Benefits with TLH

Balancing Short-Term and Long-Term Investments: Since short-term capital gains are taxed at higher rates, prioritizing losses to offset these gains can significantly reduce your tax burden. Long-term gains are taxed at a lower rate, so they should be managed differently.

Maximizing Capital Loss Carryovers: If your capital losses exceed your gains and the $3,000 deduction limit, the excess can be carried over to future tax years. This means TLH can continue to benefit your tax situation long-term.

Using TLH for High-Income Earners: For those earning $150k or more and paying over $20k in taxes, TLH can be a powerful strategy. By offsetting gains with losses, high earners can significantly reduce their overall tax bills.

Tax-Loss Harvesting Tools and Services

Robo-Advisors and Automated TLH: Many financial services, particularly robo-advisors, offer automated tax-loss harvesting as part of their offerings. These platforms can help identify opportunities for TLH without the need for constant monitoring.

Working with a Financial Advisor: A professional can offer personalized guidance on when and how to harvest losses effectively. They can also provide insights into how TLH fits within the broader context of your financial plan.

Considerations and Risks in Tax-Loss Harvesting

Market Risks and Timing: Selling an investment at a loss may mean missing out on a market rebound. Before harvesting losses, consider the potential for asset recovery and the impact on your overall strategy.

Cost Considerations and Fees: Transaction fees and other costs can eat into the benefits of TLH. Evaluate the cost of selling and repurchasing investments to ensure the net tax benefit is worthwhile.

Portfolio Drift and Long-Term Strategy: Frequent buying and selling of assets to harvest losses can lead to portfolio drift, where your asset allocation no longer aligns with your long-term goals. It’s important to balance tax savings with maintaining a well-diversified and stable portfolio.

Conclusion: Leveraging Tax-Loss Harvesting for Optimal Financial Health

Tax-loss harvesting is a valuable strategy for reducing tax liability, improving investment returns, and maintaining a healthy financial portfolio. For W2 employees and 1099 earners looking to maximize their income, tax planning is crucial, and TLH can be an integral part of that plan. 

Continuous portfolio monitoring throughout the year is key to finding the best opportunities for harvesting losses, as is consulting a financial advisor to tailor strategies to your specific financial situation. 

By leveraging TLH effectively, investors can take proactive steps toward financial freedom and early retirement.

The Short-Term Rental Tax Loophole: What Investors & High W2 Income Earners Need to Know About a Popular Tax Reduction Strategy

The Short-Term Rental tax loophole is a powerful tool for high-income earners looking to reduce their tax burden. 

This loophole specifically applies to properties rented out for short periods. Unlike long-term rentals, which are usually classified as passive income, STRs are often treated as active businesses. 

Platforms like Airbnb and VRBO have popularized this strategy, making it accessible for more people to leverage it for tax savings. As a specialized deduction our clients can leverage on top of standard deductions, it’s one of the ways Royal Legal solutions helps people achieve financial freedom.

Let’s take a closer look.

How the STR Tax Loophole Works

The STR tax loophole allows property owners to classify their rentals as active businesses if they have rental periods averaging less than seven days. By doing so, owners can use the losses from these rentals to offset their earned income. This can be particularly beneficial for high W-2 and 1099 earners, who are subject to higher tax rates. 

This loophole essentially allows you to treat the income differently than passive rental income, giving you an opportunity to reduce your tax burden.

Comparing STR Tax Loophole and Real Estate Professional Status

While both the STR tax loophole and Real Estate Professional Status (REPS) offer ways to use rental losses to offset earned income, there are key differences. 

REPS requires that you spend more than 750 hours and over half your working time on real estate activities. 

For those who earn high W-2 income but can't qualify as real estate professionals, the STR loophole is a great alternative. The STR loophole offers a simpler route to offset income through shorter participation requirements.

If you actively manage your properties and meet certain participation thresholds, we can show you how to leverage this loophole to significantly reduce your tax liability by offsetting a portion of your taxable income through material participation. 

What is the Material Participation Test for the STR Tax Loophole?

To take advantage of the STR tax loophole, investors need to pass the material participation test. This involves meeting one of seven criteria designed to show active involvement in the rental business. 

Key benchmarks include spending 500+ hours on rental activities, being solely responsible for business activities, or dedicating more hours than anyone else involved in the business. Each criterion offers a unique pathway to proving material participation.

Qualifying for the STR loophole requires more than simply owning a rental property. You need to actively participate in managing the property, keep thorough records, and meet one of the material participation requirements. 

To qualify under the material participation rules, activities that count toward your hours include property maintenance, marketing, communication with guests, and general property management. 

The required criteria for material participation include:

  1. Spending 500+ hours on your STR business.
  2. Being the sole participant responsible for STR activities.
  3. Spending at least 100 hours more than anyone else on the business.
  4. Combining significant participation activities to reach 500+ hours.
  5. Involvement in the activity for 5 out of the last 10 years.
  6. Participating in the activity for 3+ years if it is a personal service.
  7. Continuous, regular engagement in the business.

Meeting any one of these criteria can enable you to use the STR loophole to offset your active income with rental losses. Note: Hours spent on investor activities like arranging financing do not count.

Depreciation for Your Short-Term Rental Tax Strategy

Bonus Depreciation allows property owners to immediately deduct a large percentage of the cost of certain assets. Bonus depreciation is an IRS tax code that lets you “depreciate” the value of certain assets that make up a rental property more quickly than normal.

Instead of getting a tax write off over the useful life of a property, you’ll be able to get a larger deduction in the first year the asset was placed in service. By depreciating the cost of eligible assets up front, you can free up cash flow, reduce the tax liability for your business, and possibly even qualify for a lower tax bracket.

For the STR it allows the taxpayer to take a large depreciation in year one, which lowers their taxable income.

Rental Property Depreciation, on the other hand, enables you to deduct the cost of the property itself over time. This becomes a key strategy for reducing taxes, especially for STRs.

A cost segregation study helps to reclassify parts of your property from a standard 39-year life to shorter lifespans like 5 or 15 years. This allows for accelerated depreciation and can result in significant tax savings. Even as bonus depreciation phases out to 0% by 2027, conducting a cost segregation study can still maximize your property’s depreciation benefits.

Additional Strategies to Reduce Taxes on Short-Term Rental Properties

To further reduce taxes on your STR properties, you should maximize all property-related deductions. You can leverage depreciation not only for the property but also for furnishings and equipment. 

Self-managing your short-term rentals not only helps you qualify for the loophole but also maximizes the time you spend on active participation. By handling the day-to-day operations yourself, you ensure that your hours count toward the material participation requirements.

Meticulous tracking of all STR expenses, such as repairs, utilities, and home office costs, can ensure you take advantage of every deduction. Royal Legal will provide you with a financial team, including a real estate CPA and tax advisor, to optimize your tax strategy.

Properties with Multiple Units

If you own properties with multiple units, qualifying for the STR loophole can be even more beneficial. Managing multiple units means additional opportunities to accumulate hours that count towards the material participation test. 

The rules remain the same, requiring careful management and documentation of each unit.

When to Avoid Qualifying for the STR Loophole

The STR loophole is not always the right fit for every investor. If you have low or moderate income, or if you do not have the time to meet the material participation requirements, it might be best to explore other strategies. 

Overcommitting to the loophole without the ability to follow through could lead to noncompliance issues with the IRS.

Challenges & Considerations: What's Changing About Depreciation for STRs?

The depreciation rules for STRs are changing, particularly the phasing out of bonus depreciation. By 2027, bonus depreciation will be reduced to 0%, limiting the immediate tax advantages previously available. 

This change requires careful planning to ensure compliance and to maximize benefits before the phase-out. Staying up to date on tax laws and consulting with a CPA are crucial for navigating these challenges effectively. Royal Legal will guide you through the process.

Final Thoughts: Tax Strategies for Short-Term Rentals

Short-term rentals offer substantial tax advantages if approached strategically. The loophole provides opportunities for high-income earners to offset their active income, but it requires careful planning and adherence to IRS guidelines. Engaging with knowledgeable financial professionals and using property management tools can help you stay compliant and capitalize on the available benefits. As the landscape of STR tax strategies continues to evolve, staying informed and adaptable is key to long-term success.

Solo 401k: The Biggest Tax-Saver

A Solo 401k is the biggest tax-saver for real estate investors. No one likes to pay taxes, but like death–they’re inescapable.

We can’t help you escape death (we can help you plan for it), but we can help you minimize some of the onerous tax burdens you may incur due to your earned income. 

Watch Pete Schindele, CFO and CPA of Royal Legal Solutions, discuss why investors love the Solo 401K in his Royal Investing Virtual Summit presentation, Solo 401k: The Biggest Tax Saver.

In this article, we’ll discuss the features of the Solo 401K, who needs it, why the Solo 401K is the biggest tax-saver, and how to use a Solo 401k to build wealth. 

Solo 401k: Features, Myths, and Benefits

What is a Solo 401k? It’s an individual 401k that primarily benefits a business owner with no employees. 

The IRS disallows you from contributing to a Solo 401k if you have any full-time employees in your business. But you can use the plan for both you and your spouse. 

Features of a Solo 401k

Here are the basic features of the retirement plan: 

Myths Surrounding Solo 401k Plans

Myth: I can’t have more than a retirement account.

Truth: You can have more than one; it’s legal, and you act as the fiduciary. 

Myth: I’m too young to think about retirement.

Truth: You’re never too young to invest in retirement and get returns on any amount you set away in your Solo 401k.

Myth: I don’t have enough money to plan for retirement.

Truth: Some money is always better than no money in your retirement account; if you fail to plan, then you are planning to fail–especially in retirement.

Benefits of Solo 401k

Who Can Use A Solo 401k As Their Biggest Tax-Saver?

That depends on where you are on your journey. However, a Solo 401k is a powerful tool for real estate investors. As such, real estate investors need a Solo 401k because it enhances their real estate investment returns.

The Solo 401k is an integral part of the bigger picture regarding securing your financial future. It’s part of a comprehensive ecosystem geared to generate wealth and provide asset protection so you can: 

How To Purchase Property With A Solo 401k

Purchasing property with a Solo 401k makes this retirement plan a powerful tool for real estate investors. 

  1. Open A Solo 401k: You create a Solo 401k with an EIN and signed plan documents.
  2. Fund The Solo 401k: Fund it in various ways by:
    1. Making annual contributions
    2. Transfer from qualified plans
    3. Rollovers from Traditional IRAs, SEP IRAs, SIMPLE IRAs
  3. Determine Purchasing Method For Property: You have four options using a Solo 401k to invest in physical real estate. Each method has specific guidelines and rules:
    1. Cash purchase
    2. Debt financing: Get a nonrecourse loan to purchase a property
    3. LLC: Solo 401k housed within an LLC 
    4. Tenancy In Common (TIC): With a partner
  4. Put Your Offer Together: Your Solo 401k makes the offer on the property. You (the trustee) sign for the plan, and the earnest money deposit comes from the Solo 401k. 
  5. Close On Property: When you close, you (the trustee) approve and sign the property purchase documents and submit them to the closing agent. The Solo 401k wires or cuts a check for final funding. 

Managing Real Estate Bought With A Solo 401k

Once you buy a property with the Solo 401k, the plan manages the property. That means that the Solo 401k pays the bills, including: 

Never mix personal funds with Solo 401k funds; otherwise, you may trigger a massive tax event.

What about rent?

You must deposit rent checks directly into the Solo 401k account. In addition, you cannot use the rental income personally. If you withdraw the funds for personal use, it becomes a taxable distribution. 

Key Takeaways On The Biggest Tax-Saver

A Solo 401k is the biggest tax-saver for real estate investors. It allows you to control your money and offers excellent tax benefits. 

Moreover, a Solo 401k is especially beneficial when you use it to purchase real estate as it gives you unique benefits and tax-sheltered income. All in all, a Solo 401k is a robust retirement plan that generates wealth. 

Do you still have questions about how you can leverage a Solo 401k in your real estate investing journey?

Join us for our weekly Royal Investing Group Mentoring so our expert contributors can answer all your questions, dish out additional information, and provide best practices to help you succeed. 

Investment Strategies on How to Save Money on Taxes

Taxes are one part of real estate investment operational costs. Although they shouldn't drive your investment decision, you need to thoughtfully evaluate your preferred asset classes and accounts to lower your tax bill. Read on to discover helpful investment strategies to save money on taxes.

Scott Royal Smith speaks on investment strategies to help you save tax funds

While tax rates and rules might change over time, nothing beats the value you'll get from factoring in taxes while making investment decisions. 

Taxes can reduce your return on investment yearly, potentially affecting your long-term goals. Before deciding on whether to go for real estate investment, cash instruments, bonds, or stock, it's best to understand how the Internal Revenue Service (IRS) treats income from such asset classes. 

You can also gain valuable insights from investment experts like Scott Royal Smith by listening to this Icons of Real Estate Podcast episode, where he gives out vital tips for lowering investment property tax returns. 

Scott Royal Smith is an astute real estate investor and founder of The Royal Legal Solutions, where he offers asset protection services to real estate investors. 

If you're an investor looking to protect yourself against paying high taxes on your investment return, this article explores vital investment strategies you can adopt. Read to the end!

How the IRS Tax Your Investments

The IRS taxes investment income separately from the way working wages are taxed. These differences include the tax rates and how and when investment income taxes are assessed. 

Broadly speaking, investment income comes in the following two ways, with each treated differently for tax purposes.

Capital Gains

Refer to the increment in an asset price. For instance, if a real estate property or stock goes up in value, the extra amount is the capital gain. 

The government taxes capital gains when the asset has been sold. 

Cash Income or Dividends

Cash income or dividends is money you receive during the year. This cash is often subject to taxes for the year it was received. 

Taxation is a crucial factor to consider before choosing an investment strategy
Image by Steve Buissinne from Pixabay

7 Investment Strategies for Lowering Taxes

Now that you know how the IRS taxes investment income, the following are investment strategies you can adopt to lower your taxes:

#1 Opt for Long-term Capital Gains

Investment is a crucial wealth-generation tool, with the investor benefiting from favorable tax treatments for long-term capital gains. 

If you hold a capital asset for longer than a year, you'll enjoy a preferential tax rate depending on your income level. It could be 0%, 15%, or even 20% of the capital gain. 

Alternatively, the IRS will tax your capital gain at ordinary income rates if you hold the asset for less than a year before disposing of it. Therefore, it's best to understand short-term vs. long-term capital gains before starting your investment journey. 

#2 Max Out Retirement Accounts

Employees can enjoy reduced taxes from contributions up to $19,500 in a 403(b) plan and $20,500 in a 401(k) plan. Also, workers up to 50 years and more can add $6,500 to their retirement plan contribution. 

Alternatively, employees without a workplace retirement plan can contribute up to $6,000 or $7,000 for people above 50 in their traditional individual retirement account (IRA) and enjoy a tax break. 

Taxpayers with workplace retirement plans can deduct all of their traditional IRA contributions, depending on their income. 

Check the IRS rules for how much to deduct and if you're qualified for such deductions. 

The right investment strategies can save an investor from double taxation
Image by Nattanan Kanchanaprat from Pixabay

#3 Utilize a Health Savings Account

Consider using your health savings account to reduce taxes if you have a high-deductible health insurance plan. If you're lucky, your employer might match your health savings account (HSA) as with a 401(k). 

This contribution by payroll deduction is exempted from your taxable income and is completely tax-deductible from your income. Presently, the maximum deductible contribution for individuals is $3,650, while for families, it's $7,300. 

These funds can grow without you paying taxes on the earnings. Your withdrawals won't be taxed if you use your HSA to pay some medical expenses. 

#4 Lower Long-term Capital Gains Rates

The IRS fixes the wage and investment income differently, as reflected in the IRS capital gains treatment. Depending on your income level, the IRS taxes capital gains at 20%, 15%, and even 0%. However, you have to play by the rules. 

These taxes are often lower than short-term capital gains, taxed at the ordinary income rate. If you're a buy-and-hold investor and hold your investment for over a year, you can take advantage of lower long-term rates. 

For instance, if you earn less than $80,800 as a couple or $40,400 as an individual filer, you can be exempted from qualified dividends or capital gains up to a specific threshold. 

If you gain too much ordinary income, you'll be ineligible to qualify for the 0% rate and have to pay a higher investment tax. 

More so, if your income is less than average in a tax year, you can gain a 0% investment tax rate and increase your investment cost without any tax hit. 

#5 Employ Tax Loss Harvesting

Entails using your investment losses to offset the gains yearly, helping to reduce your income tax liability at the federal level. 

If your investment losses are more than the gain, you can use tax loss harvesting to offset about $3,000 of the annual federal taxable income. You can also carry additional losses over to future tax years. 

Tax loss harvesting can be valuable for high-earning investors with a long-term higher capital gain tax and a potential 3.8% additional net income tax. Note that if you hold off selling your asset till later in the year, the prices will depend on the year's final weeks of market downturns. 

Identical stocks bought within 30 days after or before the sale will also be regarded as a wash sale, which may render it ineligible for tax loss harvesting for that tax year. 

Consider consulting a tax advisor to understand how the wash sale rules work and if it prevents you from using the tax loss harvesting strategy. 

The right investment strategy can help you lower taxes on real estate investments
Image by Gerd Altmann from Pixabay

#6 Use a 1031 Exchange

Real estate investors looking to sell a property that isn't their primary residence can take advantage of the 1031 exchange and reinvest the money into another building. 

1031 works by allowing you to sell your property, defer your capital gains, and invest the money into another like-kind investment property quickly. However, 1031 exchanges come with specific rules.

These rules can be complex, but you must follow them strictly to avoid losing your tax deferral. Like other asset types, you can hold your investment long-term and defer capital gains for up to decades. 

Most importantly, you get to avoid high real estate commissions. 

#7 Consider Asset Allocation

Generally, cash distributions and dividends are taxable in the year they're received. Therefore, if you use a taxable account, you can't avoid paying taxes as with capital gains. 

Getting low dividend taxes depends on where you keep your assets. For instance, you can opt for a tax-advantaged account, like a standard taxable brokerage account or an IRA. 

For investors with dividend stock, it's best to keep them within the tax-free confines of an IRA to avoid taxes on the distributions. Alternatively, you can hold stocks with possible capital gains in a regular taxable account. 

You can enjoy IRA's key benefits (tax deferral) in a taxable account until you're ready to sell your investment. However, consider whether packing your whole dividend payers into the IRA is the best financial decision.

Final Words 

Although paying taxes to the authorities is crucial, you don't have to pay more than is necessary. Taking your time to peruse the IRS website and other reputable financial information sites might lead to tax savings up to hundreds or even thousands of dollars.

Don't forget to get resources from successful investors. To gain more insight, you can listen to renowned serial real estate investors like Scott Royal Smith talk about asset protection and how to lower investment taxes on the Icons of Real Estate podcast. 

Whatever investment strategies you adopt, remember the goal is to make tax-efficient decisions. Also, consider how the investments will diversify your portfolio while pursuing your overall investment goals at your preferred risk tolerance level. 

Don't forget to consult a professional tax advisor before making investment decisions to avoid incurring more taxes instead of lowering them. 

However, if the technicalities involved in active real estate investing are too much for you, real estate companies like Holdfolio offer you the chance to become a passive real estate investor and earn returns without doing any work.

This article is sponsored by ArdorSEO, the leading online management company offering local real estate SEO services to help real estate agencies reach more prospective customers online. 

Conclusion

If you're tired of paying more taxes on your investment, you need to learn how to lower investment taxes through seasoned experts like Scott Royal Smith. Catch him speaking about how to reduce investment taxes at the Icons of Real Estate podcast and learn how to become a successful real estate investor like him. 

Tax Filing with Partners Using an LLC or Series LLC

While having a partner may make business sense, tax filing with partners can be complex and confusing. Paying taxes is painful. It’s tough to part ways with your hard-earned money when you have business expenses and maintenance to handle. 

This article doesn’t include every tax break or loophole available. But it provides helpful, clarifying information about tax filing with partners in an LLC or Series LLC. 

Tax Benefits Of An LLC Or Series LLC

There are several advantages of selecting a series LLC as your business structure. It provides you with asset protection and anonymity, but there are also tax implications. Let’s check out some things you need to know about how tax filing with partners works with an LLC. 

Remember, a series LLC is unique because it has a parent LLC and a series of children LLCs under it. Each entity in the structure provides its own layer of asset protection and anonymity and is protected against risk from other series. As a real estate investor, this allows you to segregate risk and hold several different properties without incurring the cost of setting up new business structures for them. 

First, the IRS treats a series LLC as a single entity. Since it’s a pass-through entity, you can choose how you want to be taxed by the federal government. You have the option to choose between being taxed as a: 

We will focus on the partnership or filing taxes with partners. 

What Options Do I Have For Filing Taxes With Partners?

Filing taxes with partners depends on a few factors. But first, let’s talk about what it means to be a partner. The IRS considers any individual who owns an asset with another individual to be partners.

In most cases, partners must file a Form 1065 to report their income, gains, losses, deductions, and credits. An exception to that is if you are married to your partner. In the case of marriage, you can file Form 1065 and then do your taxes as you normally would. 

There are some benefits of filing taxes with partners using Form 1065. 

Cash In On These Tax Tips 

Filing taxes with partners using Form 1065 can benefit you and your partner. Recall that if you’re in a partnership, you’ll have to file a Form 1065 (unless you’re married to your partner). The 1065 (and Schedule K1) may be beneficial. 

For instance, Form 1065 allows you to: 

Protect your assets

When you file Form 1065, you can move the tax liability of your business entity to the partners who have an interest in it. The form tracks your and your partner’s financial participation in the business on Schedule K1. 

The 1065 and K1 protect your assets because the total income and expenses are a single line item. There aren’t separate spaces for your properties, just for your overall income and expenses. 

Simplify your expenses

Through the ordinary course of business operations, you may encounter expenses that do not directly tie to one of your properties. When you file with Form 1065, it’s easier to specify those expenses and claim them on your taxes. 

Some examples of typical expenses you may claim on Form 1065 include the following:

Using Form 1065, you can enter the whole number as an expense, preventing messy records and bookkeeping. 

Secure loans

Banks sometimes favor Schedule K1 income over Schedule E income when you apply for a loan. The bank may look at your Schedule K1 income and accept the number of expenses you claim. 

On the other hand, if you supply your Schedule E income, banks will have predetermined vacancy credits, repairs, and maintenance that may lower your income. This may be especially harmful if you have new houses in your portfolio where you can get dinged for nonexistent expenses. 

There are some considerations when filing Form 1065. For instance, it takes a long time to get a K1, so your taxes are due on March 15. If you need to file for an extension, you must submit it by September 15. Another issue is that a 1065 and K1 can be complicated, so you may need a professional to help you prepare the forms. 

Key Takeaways

Filing taxes with partners through an LLC requires you to complete Form 1065 and Schedule K1. That rule applies to all partnerships unless you’re married to your partner. In that case, you can file a 1065 or in a different way. 

There are some benefits to filing using Form 1065, including, but not limited to, its ability to: 

It takes a long time, and it may be complicated to file taxes with partners using Form 1065, but we’re here to help. Book a free discovery call to find out how we can best solve your tax needs.

Inflation Reduction Act Impact on Investors

Do you know much about President Biden's Inflation Reduction Act? If not, you're not alone. 

This bill, signed into law in August 2022, is new and pushes many real estate investors into murky waters. 

The IRS hasn't provided clear guidance on the Inflation Reduction Act, and many wonder what the new law means for the real estate industry. 

We'll show you the most relevant portions of the Act and how it might affect you as a real estate investor. This discussion won't be a comprehensive guide, but it will demystify some of the sections of the Act that influence your bottom line. 

What Is the Inflation Reduction Act?

The Inflation Reduction Act (IRA) was passed in the Senate and House of Representatives; President Bident signed the legislation into law on August 16, 2022. There is good news for real estate investors in the bill. 

In most cases, the IRA should not raise your taxes; instead, to combat inflation, the IRA created the following ways to increase tax revenue: 

The increase in enforcement might affect you as a real estate investor. An increase in enforcement probably means more audits due to more IRS agents, but you can protect yourself with good bookkeeping practices. 

Reducing Interest Rates, Probably

It's in the name–the bill aims to reduce inflation. With a reduction in inflation, the Federal Reserve can start easing back the interest rate hikes it's been implementing. This change takes time, but the end is–ostensibly–near, and Chairman Powell might be willing to ease up on the aggressive measure taken to date. 

That's good news for a real estate investor because lower interest rates should coincide with favorable mortgage rates; reasonable mortgage rates should result in more property deals.

One of the most relevant portions of the bill for real estate investors is the $369 billion earmarked for green energy and energy security. 

The Impetus To Go Green

The IRA provides $369 billion to tackle the climate crisis in the United States. The primary provision is tax incentives and credits for homeowners, businesses, and investors. 

Energy Costs For Real Estate Investors

The cost of energy increased to historic highs in 2022. As a real estate investor, you likely incurred increased utility bills in your properties, and that added cost significantly impacts your cash flow. 

An investment in green energy ideally will lower the cost of energy across all sectors, including for you. 

Another provision in the bill may help real investors mitigate the energy cost while also receiving tax credits by going green. 

Focus on Solar Energy

The relevant section for the solar panel tax credit is §13102 of the Inflation Reduction Act. This section extends the commercial tax credit for solar panels to 2034. 

Starting on January 1, 2022, your max tax deduction will be 30% of the solar panel's cost to your real estate property. The solar panel credit no longer has to go to your primary residence. 

Here is an example illustrating how that credit works for a real estate investor. 

Suppose you have a single property that you own and lease to tenants. You invest in a solar panel system that costs about $13,000. If you meet the requirements and earn the tax credit, the IRS will pay for 30% of the system, or $3,900. 

That's a good incentive, but additional benefits have to do with depreciation. You already have the 30% tax break, but you also have the provisions of 26 U.S. Code § 168, which gives energy property a 5-year life. That means you can depreciate the value of the panel over five years.

That matters for real estate investors because you get multiple benefits from installing solar panels: 

The federal government has stipulations for these credits and benefits: 

Exciting Electric Vehicle Rewards

These incentives apply to your real estate business' commercial vehicles. The IRA expands the 30d clean vehicle tax incentive through 2032. The incentive includes: 

Key Takeaways

The Inflation Reduction Act is probably a good thing for real estate investors, but we need further guidance from the IRS to understand its full impact. 

While there may be minor changes to the law and enforcement, a real estate investor should enjoy the benefits, including: 

Do you want to learn more about how to secure your financial freedom? Book a free discovery call to learn how to handle the new law and your potential taxes.

Why Are 90% Of Real Estate Investors Overpaying Federal Income Taxes?

Death and taxes. These are two guarantees in life, but you shouldn't be stuck overpaying taxes. 

Paying the government doesn't always feel great, and overpaying taxes feels worse. Do you feel a pinch of pain when the government separates you from your hard-earned money? If so, you're in luck. 

This article doesn't list every tax-saving strategy available to you. 

What we'll show you instead is a handful of strategies that work. These strategies are easy to execute for your business and can potentially lessen your tax burden. 

Effective Entity Structures Reduce Overpaying Taxes

When you set up your business, you should make sure that you have an effective entity structure. Typically, your options are an LLC, sole proprietorship, an S-Corp, or C-Corp, depending on your financial situation. 

Limited Liability Company (LLC)

An LLC enables you to access a swath of tax benefits you might not otherwise have as a sole proprietor. Using an LLC as your business entity might save you from overpaying taxes. 

The primary strategy for tax savings via an LLC is pass-through. Pass-through is when an LLC's earnings are "passed through" to you, the owner. You do not have to pay corporate federal income tax on the income. 

Another thing is that the income from an LLC isn't subject to withholding tax. Instead, you'll file tax payments every quarter for federal income tax. 

You can choose how you'll be taxed as an LLC by filing an IRS Form 8832. But, there are some limitations. 

An LLC with more than one owner cannot choose to be taxed as a sole proprietorship. Typically, the government will tax your LLC as a partnership if you have multiple owners. 

Sole Proprietorship

The IRS views you and your business as a single entity. On the one hand, you have a level of freedom. On the other hand, you have additional tax responsibilities. 

You can avoid overpaying taxes by leveraging: 

The drawback to a sole proprietorship is that you have to pay the self-employment tax in addition to income tax. Self-employment taxes include Social Security and Medicare taxes.

S-Corporation  

An S-Corp is a small business entity. It'sIt's separate from the owners, which means that neither the owners nor shareholders are responsible for the business's finances. 

To form an S-Corp must have: 

An S-Corp provides tax benefits mainly on self-employment taxes (SS and Medicare). That means you can avoid overpaying taxes. Keep in mind that an S-Corp must pay any employee a reasonable salary.

The following is an illustration for educational purposes. 

Suppose you are self-employed and make $100,000. You would owe $15,300 in self-employment tax. 

In an S-Corp, you earn that same $100,000. In this example, you pay yourself a reasonable salary of $50,000. Only that $50,000 salary is taxable at 15.3% totaling $7,650. Compared to the self-employed taxes, you would be saving $7,650. 

The other $50,000 is a distribution reported on your income tax return.

Other tax savings might include: 

C-Corporation

A C-Corp is a business entity with room for growth and several tax benefits. It'sIt's a separate entity from its owners and offers a layer of protection to the owner's assets. 

A C-Corp tax structure differs from an S-Corp or an LLC. A C-Corp has to pay federal corporate taxes, also called double taxation. On the surface, that sounds terrible, but a C-Corp has benefits that may prevent you from overpaying taxes.  

A C-Corp is taxed as a corporation first, and then shareholders pay taxes on dividends personally. Here are the ways you offset that tax burden:

Retirement Funding Vs. Overpaying Taxes

Another way you can avoid overpaying taxes is through innovative retirement funding. You can deduct the funds you set aside for your Solo 401K from your taxable income. 

You use the power of Solo 401K to invest in real estate. Here is the process:

You are the trustee of the Solo 401K, but the purchaser of the real estate is the Solo 401K as an entity. That way, you avoid paying the UDFI tax when you purchase the property.

Stop Overpaying Taxes, Save Money As A Real Estate Pro

As a designated real estate professional, you aren't subject to the passive activity loss rule of IRS Sec. 469(c)(2).

As a real estate professional, you can avoid overpaying taxes because the passive activity loss rule doesn't apply to you. That means you can deduct losses from nonpassive income from your real estate business, including: 

To qualify as a real estate professional, you have to pass three tests: 

Key Takeaways

No one likes paying taxes. It's an even worse tragedy to overpay taxes when remedies are available to you. 

To avoid overpaying taxes, employ the following strategies: 

Are you ready to speak with an expert? Learn about our comprehensive solutions you can use to legally reduce your tax burden. Book a FREE discovery call now.

Hiring Your Children Has Monumental Benefits: Decrease Taxes, Increase Profits

Finding money-saving strategies for your real estate investment business isn't easy. It's hard. That's why the most successful investors are vigilant and proactive when finding powerful tax breaks. Have you considered hiring your children to decrease tax liability?

Does saving money on taxes sound attractive to you? You're definitely in the right place.

This article lists the remarkable tax benefits of hiring your children.

These benefits work to reduce your taxable income. These strategies are easy to use for your real estate investment business and save you money. You'll have more available cash to grow your business and secure your financial freedom.

The Truth About Hiring Your Children

The benefits of hiring your children are a massive advantage for running your own company. The type of business you have matters.

The IRS has guidelines for Family Help, but in general, the rules for your business are:

No matter what type of business structure you have, you will want to find ways to reduce your taxable income. Royal Legal Solutions can help. Be sure to check out our robust collection of Tax Strategies and Services. You will find expert advice about a myriad of tax strategies that you can leverage as a real estate investor.

Quick And Easy Tax Relief

The tax benefits of hiring your children are substantial. The standard deduction for 2022 is $12,950. Your child does not have to pay income tax on the money owed. It's tax-free!

Those wages matter to you as a business owner because you get to deduct your child's wages which lowers your business' taxable income. That's a win-win! There is an additional way to save $6,000 with the cunning use of a 401K or Roth IRA.

Suppose you pay your child $12,950. Additionally, you pay $6,000 into a tax-deductible IRA in which you are the custodian. A retirement account is an extraordinary exploit because you:

This strategy works for each of your children who you employ. That means if you have 2 children, you can potentially deduct a little more than $37,000 from your company’s taxable income.

IRS' Reliable and Direct Rules About Hiring Your Children

There are several benefits of hiring your children. The IRS is aware of the benefits of you hiring your children to work for you, and they keep close tabs on taxpayers who try to abuse the system.

To avoid running afoul of the IRS, here are some guidelines you need to keep in mind when you decide to hire your children:

Free Money: Defeating FICA

If you have an adult child who works for you or a corporation, you have to pay FICA. Don't fret, though; you have a few strategies at your disposal to enjoy the benefits of hiring your children.

The first strategy is to hire your adult child on an ad-hoc basis. That means you hire your child for single, one-of projects. For instance, perhaps your child is good at programming, and you pay them $7,000 to create a software program for you. In that instance, you would not have to pay FICA.

You have to be careful here, though, because you might have to pay FICA if you hire your child consistently. A consistent basis might be several projects in one year or a project every single year.

The rules are clear if you are an S-Corp. You have to withhold FICA taxes from your child's paycheck. In that case, you need to be innovative.

Here is how you can still avoid paying payroll taxes on your child's wages:

Key Takeaways

Exploit the powerful tax benefits of hiring your children for your real estate business. You will be able to save substantial money on taxes, up to $18,950 per child. When employing your children, follow the IRS rules and keep pristine records.

First-Time Homebuyer Tax Credit: Can You Qualify?

Are you a first-time homebuyer? Good news, there are some excellent tax benefits for you!

You should know about a tax credit that puts more money in your pocket. The first-time homebuyer tax credit currently provides a refundable credit equal to 10% of the purchase price. The maximum tax credit is $8,000.

In 2021, President Biden and the 117th Congress submitted H.R. 2863-First-Time Homebuyer Act of 2021, which increases the tax credit to $15,000. Congress referred the bill to the House Ways and Means Committee, where it still sits. 

Read on to learn more about: 

First Time Homebuyer Rewards

According to the IRS, a first-time homebuyer is a person (with your spouse) who has not owned any other principal residence for three years prior to purchasing the new principal residence for which the credit is being claimed.

A principal residence is the dwelling where you and your spouse live most of the calendar year. You can only have one principal residence at any one time. 

You can either be a first-time homebuyer or a long-term resident and still qualify to get the tax credit. As a long-term resident, you are entitled to receive up to $6,500 in credit for purchasing a new principal residence.

First-time homebuyers are subject to gross income requirements.  

Income Tip And Secrets 

The income requirements to qualify are different for single and joint filers. The IRS looks at your modified adjusted income (MAGI) for this credit. Your MAGI is your adjusted gross income plus exempt or excluded income and certain deductions.   

MAGI limitations for the first-time homebuyer tax credit are:

How To Circumvent Challenges

Several situations can arise in which you are ineligible for the first-time homebuyer tax credit. First and foremost, if you exceed the MAGI limitations, you will not qualify for the tax credit. That’s not ideal, but you should know about the myriad of tax deductions available to you as a real estate investor. 

Check out our expert and informative articles on taxes to see what strategies you have available. 

Another reason the tax credit would not apply is if you purchased a home outside of the United States. In addition, you cannot sell the house or have the home stop being your principal residence in the year you bought it. That means you cannot use this tax credit to help you flip a house. 

If you received your home as a gift or inheritance, you cannot claim this tax credit. 

Shrewd Strategies To Stay Profitable as a First-Time Homebuyer

There are some situations where you will have to pay back this tax credit. For instance, suppose you decided to purchase a home and qualify for the credit. If you choose to sell the house within 36 months of the purchase date, you will have to pay back the credit. 

Perhaps you buy this home as your residence but decide to convert the home to a business or rental property. That means the house is no longer your principal residence. Since the home is no longer your principal residence, you will have to repay the credit. 

If you cannot keep up with the payments on the home and it goes into foreclosure, you will have to repay the credit.

You will have to include the credit amount as an additional tax on your tax return to repay the credit. 

If I Lose The Home, Do I Always Have To Pay The Credit? 

In some situations, when you lose the home, you will not have to pay back the tax credit.

For instance, suppose an act of God or some other disaster destroys your home. You do not have to pay back the credit if you purchase a new principal residence within two years of the home’s destruction.

Suppose the government finds your house unfit to be lived in and condemns it. No one is allowed to live on the property because of the safety hazards. In the instance of condemnation and your subsequent property abandonment, you don’t have to pay back the tax credit provided you purchase a new principal residence within two years of the condemnation. 

Maybe you get a divorce and lose the house to your now former spouse, the person who receives the home is on the hook for the tax credit.

Spotlight: The Bottom Line for a First-Time Homebuyer

As it currently stands, first-time homebuyers can earn up to an $8,000 credit to purchase their principal residence. Long-term residents can also qualify for a more minor $6,500 credit if they buy a new principal residence. 

The income limitations are $125,000 for single filers and $225,000 for joint filers. There are some situations where you will either not qualify or have to pay back the credit. Overwhelmingly those situations involve selling or losing the house. 

Taxes can be complicated, but they don’t have to be. To learn more about powerful tax savings strategies that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time we speak.

Self-Funded Pension Plan to Reduce Taxable Income

Are you interested in reducing your yearly taxable income? Like most keen real estate investors, you are looking for ways to save money and increase your cash flow. A self-funded pension plan might be right for you.

A self-funded pension plan, also called a defined benefit plan, is a powerful tax strategy for self-employed investors who have a steady income. The main idea behind setting up a self-funded pension plan is to lower your current year's taxes and provide you with options when you retire.

We recently chatted with Royal Legal Solutions' tax expert, Pete Schindele, CPA, and discussed this powerful tax strategy. Feel free to watch our discussion, "Self-Funded Pension Plans for Entrepreneurs," for more information.

If saving money on taxes and having an additional income is something that interests you, please read on.

What Is A Self-Funded Pension Plan?

Also called a defined benefit plan, a self-funded pension is a retirement tool. A pension is a retirement fund for employees paid by the employee, employer, and in some cases, both. When the employee retires, the fund pays out an annuity.

Now that you know what a pension is let's delve a little deeper into the self-funded part. Anyone can set up a retirement fund, even if they are self-employed. For instance, suppose you have an LLC or an S-Corp as your real estate business, and you are the only employee.

As an employee in your business, you can create your pension and fund it with the profits from your company. It would help if you considered some things before setting up a self-funded pension plan.

Who Should Set Up A Pension?

Anyone can set up a pension. Here are some things to consider before you make that decision–ideally, you:

If this sounds like your situation, a self-funded pension plan might be just the right tax savings vehicle for you. As with every business decision, you need to consult with your tax professional to ensure that a self-funded pension is a prudent business decision.

When Is The Right Time To Set Up A Self-Funded Pension?

There are no hard and fast rules for setting up a self-funded pension. It would be best if you talked to your financial advisors and tax professionals to determine the ideal time for you. Our tax expert, Pete Schindele, CPA, provides some general guidelines that might indicate that the time is right for you:

Is Setup And Maintenance Of A Pension a Hassle?

There are forms you will have to fill out with the help of a financial professional to get started. In addition, you will need to have at least three years of W-2s. The tax documents provide information to your tax professional about how much you will invest in the plan.

To maintain the pension, you must submit an additional tax document every year. Then, yearly, an actuary does a study to ensure that you funded your retirement plan appropriately. The actuary's fee ranges from $1,000 to $2,000 per year.

How Does A Self-Funded Pension Save Money In Taxes?

Suppose you have maxed out your other retirement plans, but you still have an additional income you want to protect from taxes.

Let's say that you have an additional $30,000. You would set up a pension and fund it with that extra $30,000. That money is tax-free, and you have saved about $9,000 in taxes, minus the actuary's fees.

That is not to say that a self-funded pension is without drawbacks. There are some things to keep in mind before you decide on making this decision.

What Are the Drawbacks to A Pension?

The self-funded pension is ideal for businesses or investors with a stable income. Wild swings in revenue are not going to work. Remember, you have to fund the plan every year–this is a fixed cost.

The actuary fee is steep. It ranges between $1,000 to $2,000 per year.

If you overfund the pension, you have to pay an excise tax.

Here is an illustration of how that would work. You have paid into your pension to the tune of $600,000. The IRS investigates your balance and determines that your fund should have $500,000. You have $100,000 too much in the pension. The IRS will force you to pay an excise tax on that additional $100,000.

A self-funded pension is not great for younger investors because it will be long before they can enjoy the funds. It's much better for more experienced (age-wise) investors.

How Does A Pension Work With Estate Planning?

You have the opportunity to name heirs, or you can get a lump sum payment from the pension when you retire.

Another thing you might consider is using the pension disbursements to pay for life insurance to earn even more money. Term life insurance premiums will be expensive when you retire because of your age. Instead of drawing the money from the pension, you can use it to pay for the life insurance premiums.

The life insurance will not be taxed when you die, and the income goes to your heirs. The payout from the life insurance will be more than from the pension.

FAQs: Self-Funded Pension

How does the pension differ from a Solo 401K?

With a Solo 401K, you are:

With a self-funded pension, you are:

When should I set up a pension?

First, you should invest in a solo 401K, an SDIRA; then, you should set up a self-funded pension with additional income.

Is there a baseline minimum income requirement?

It depends on the situation. There is a cost to implement, and you need to check your tax rate. Those variables make it impossible to determine a baseline requirement. Any advice requires you to do a cost-benefit analysis with your CPA or tax professional.

Key Takeaways

A self-directed pension plan requires you to have a history of good revenue for three to four years. It's also ideal if you have already maxed out your Solo 401K contributions—a couple of years.

In general, the pension is ideal for older investors. Be careful with the excise tax. Work with your tax professional to ensure you don't overfund the plan. The operational costs to set up and maintain your pension plan are not prohibitive. Finally, you can pass the funds on through the pension or clever use of a term life insurance policy.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

Augusta Rule: Homeowners Can Earn Tax-Free Income

Paying taxes isn’t fun. It’s a pain. The pain is why most real estate investors jump at opportunities to earn tax-free income using the Augusta Rule.

The Augusta Rule, or IRS Section 280A, applied to the residents of Augusta, Georgia, who would rent out their homes to attendees of the golf tournament.

Do you want to know more about how the savviest of real estate investors leverage this tax rule to their advantage? Read on to learn more about the Augusta Rule and its potential benefits to your real estate investing business.

What Is The Augusta Rule?

As mentioned, the Augusta rule originated with people renting out their homes. Subsection (g) of the code reads in part, “if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is rented less than 15 days during the taxable year, then the … income derived from such use for the taxable year shall not be included in gross income.”

The rule applies to any taxpayer who owns a home in the U.S., provided that your home is not your primary place of business. One thing to note here is that the presence of a home office does not make your home your primary place of business.

The Augusta Rule IRS exemption applies to your (the owner):

That means you can rent out your residence for fourteen days and earn rental income but not have to report that income on your federal taxes.

How Does The Rule Work?

The Augusta rule works when you rent out a dwelling unit as a personal residence.

Here is a list of assets that are personal residences for Augusta Rule purposes:

You may qualify for the exclusion as long as you use that dwelling unit as a residence. While you can earn money through the rule, expenses related to your property rental are not deductible.

There is a 14-day limit on the number of days you can rent your property before claiming the rental income on your federal taxes.

What Is The 14-Day Rule In The Augusta Rule?

The rule has a provision that states you can only exempt 14 days of rental income from your taxes. On day 15 of rent, you have to report the entirety of the rental income to the government and get taxed accordingly.

The 14 days are cumulative, not consecutive. That matters because it gives you flexible options to generate rental income. For instance, at Super Bowl LVI in Los Angeles, a person who lived adjacent to Sofi Stadium rented their 2,500-square-foot home for $10,000 over the football weekend.

You may not see the same extreme prices, but there are plenty of ways you can maximize your rent for those 14 days. You might consider matching your rentals when an influx of visitors creates a spike in demand, including:

It would be best to charge a fair rental market price and avoid possible legal snags. To help you set the right rental market price:

An advantage of using rental websites is they track rent prices and rental rates that you can present to the IRS should they have questions.

Renting out while your market is hot is a good strategy. Another unique opportunity is having your real estate investing business rent the property from you.

Why Is Using The Augusta Rule Unique For Tax Planning?

The rule lets you shift income from your small business directly to you without paying taxes. For instance, you could rent your home to your small business to receive a tax deduction at the business level and exclusion from the rental income at the personal level.

Here is an illustrative example of how the August Rule could work for you. Suppose Jason is an owner of a small business.

Each quarter, the business rents Jason’s vacation home to hold meetings, strategize, and plan for the upcoming year. In total, the company rents the vacation home for fourteen days. The fair market rental rate for those fourteen days comes out to $10,000.

Jason’s business deducts the rental price as a legitimate business expense of $10,000. Since the company rented for only fourteen days, Jason does not need to report the $10,000 income.

What should Jason and the business do to ensure he does not get in trouble with the IRS?

In the preceding example, Jason potentially saved $3500 in federal taxes.

How Do I Determine The Right Rate?

Remember to call around hotels to get quotes and check out online rental sites like Airbnb, HomeAway, and Vrbo. Remember to look for similar properties to yours. For instance, suppose your house has amenities, like a pool and jacuzzi. It would be best if you found rates for similar spaces with extras, like a pool and jacuzzi.

Here is a list of things that you should consider when getting a quote:

It is critical to maximize the rent for these fourteen days. One way to do that is to remember the preceding list of invisible amenities your home provides.

Key Takeaways

The Augusta Rule is a way that homeowners can earn tax-free income from a residence.

Keep in mind these four fundamentals to maximize your income and minimize your entanglement with the IRS:

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

Roth Conversions to a Solo 401K to Offset Losses

Are you a self-employed real estate investor? If so, the solo 401K may be the best option for you. The solo 401K is an IRS-approved retirement plan that enables you to minimize your tax burden. Read on to learn more about how this tax strategy works and how you can offset losses with a solo 401K and Roth conversions.

What is a Solo 401k?

As mentioned, a solo 401K is an IRS-approved retirement plan. Also, the solo 401K is ideal for self-employed business owners or business owners with one other employee, usually their spouse.

This retirement plan allows contributions of up to $60,000 each year.

If you want to learn more about the solo 401K and its many benefits, read our informative guide: Solo 401K vs. Self-Directed IRA: Which Is Better For You?

What is a Roth IRA conversion?

A conversion is a taxable movement of cash, real estate, or other assets from a Roth IRA to a Solo 401K.

When you convert from a Roth IRA to a solo 401K, there's a tradeoff. You will face a tax bill, possibly a big one, due to the conversion. If you decide to convert a portion of your Roth IRA conversions into a Solo 401K, you will pay taxes on the money you convert.

However, you'll be able to secure tax-free withdrawals as well as several other benefits, including no required minimum distributions, in the future. With proper tax planning, you may even be able to mitigate the tax bill from the conversion.

All in all, you pay taxes on the money you convert to secure tax-free withdrawals and several other benefits. One of the most significant benefits is that you will no longer have the required minimum distributions in the future.

Why are Roth conversions a popular tax strategy?

Roth conversions remain popular as many taxpayers fear that tax rates will only increase in the next few years. A Roth conversion enables you to convert now at lower tax rates, let your account grow, and let you make a tax-free withdrawal over the life of your retirement!

How is a solo 401K different from a traditional IRA or 401(k)?

Remember, if you have a traditional IRA or 401K, that money grows tax-deferred, but you pay tax on the distributions as you withdraw the funds at retirement.

The tax rate might be much higher when you retire. That means you would potentially lose more money to taxes each time you make a withdrawal.

Another thing to remember is that once you reach age 72, you must withdraw a certain amount of money each year, or the "required minimum distribution."

How can I offset losses with a Roth conversion?

One of the ways to mitigate the tax impact of the conversion is for a business owner to offset net operating losses (NOL). The income generated by a Roth conversion may offset the NOL, and the business owner may not incur any additional tax liability. Additionally, there is no limit to the amount of income that an NOL can offset.

What is a net operating loss?

Generally, a net operating loss (NOL) is an excess of deductions over income from the operation of a business. These deductions are expenses from the operation of a business.

For individuals, an NOL may also be attributable to casualty losses. A casualty loss occurs from the destruction or loss of your (taxpayer's) personal property. The casualty loss is a single, sudden event.

For instances of theft, you will need to prove that someone stole the property.

Example of how you would offset losses with a solo 401k

First, a disclaimer: these calculations can be complex, and investors should consult with a tax professional or financial advisor to decide the best strategy for them.

The following example illustrates the calculation.

INCOME

Spouse’s wages
$75,000

Interest and dividends
5,000

Total income
80,000

DEDUCTIONS

Net business losses
(itemized deduction and personal exemptions not allowed in net operating calculation)
(170,000)

NOL for tax year
(90,000)

Income from Roth IRA conversion
90,000

Net taxable income
0

This example is for illustrative purposes only.

In this case, the couple may decide to convert $90,000 from the IRA. Then they can use that $90,000 to offset the loss and possibly avoid generating any tax consequences.

If you want to learn more about how the solo 401K lowers your tax burden, read Self-Directed Solo 401K: How to Avoid Tax Penalties.

Here's The Bottom Line

The solo 401K is probably right for you if you are self-employed. You need to decide if it's the right time for you to convert money in your Roth IRA to a Solo 401K.

If you do decide on a conversion, remember the tax bill upfront secures your freedom from "required minimum distributions." Also, you may be able to offset your losses with a solo 401K.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

Tax Savings Strategy to Achieve Financial Freedom

Are you ready to grow your real estate business? To do that, you need a solid tax savings strategy.

You already know that there are considerable advantages to investing in real estate. The passive income, substantial tax savings, and long-term security most likely drew you to real estate investing.

Real estate investing is the first step in your plan for financial freedom. The first thing you need to focus on is finding good real estate deals.

The next step is to maximize how your money works for you. Read our list of six tax savings strategies to achieve financial freedom and build wealth.

#1: Start with the children, house, and vehicle

#2: Maximize your deductions

This tax strategy is primarily for single-family home investors and the available deductions.

You have a multitude of deductions available to you as a real estate investor.

Deductions that do not impact financing Deductions that do impact financing
- Amortization
- Auto
- Depreciation
- 529 Plan
- Home office
- HSA
- SDIRA
- SOLO 401K		 - Business expenses
- Credit card processing fees
- Legal fees
- Office furniture
- Office supplies
- Repairs and maintenance
- Tax prep fees
- Travel expenses

As a sharp real estate investor, you need to know which deductions impact financing because it affects your ability to get loans, secure more properties, and generate wealth.

#3: Start a SOLO 401K

With a SOLO 401K, you can save $58,000 a year in taxes. If you're married, the tax savings increase to $116,000.

How a SOLO 401K works as a tax savings strategy:

Do you want to know more about this powerful tax vehicle? Visit our SOLO 401K Hub to learn more!

#4: Create a Self Directed IRA (SDIRA)

You can add a Self Directed IRA on top of your SOLO 401K.

This SDIRA enables you to manage everything as long as you set up an LLC owned by the IRA. Then, you can invest through the LLC and shelter about $7,000 more per year from taxes.

#5: Use the DB(K) Tax Savings Strategy

The official name of this plan is the Eligible Combined Plan which Congress created as part of the Pension Protection Act of 2006 under Section 414(x) of the Internal Revenue Code.

You can combine the SOLO 401K and SDIRA with the DB(K) strategy. You gain an additional shelter which allows you to grow your wealth with a deferred tax, more capital in play, and higher returns.

#6: Get a Real Estate Professional Designation

If real estate is the primary source of your income or you are a "stay at home" husband or wife, use this strategy.

You can use your depreciation and other losses from real estate to offset other income.

If you are a high self-employed or 1099 income earner, you should consider investing in commercial and multifamily investments. You can use cost segregation, accelerated, and bonus depreciation to avoid taxes.

Even if you are a W2 employee, you have to document your time thoroughly and may be able to secure the designation.

Learn more about the requirements it takes to earn a real estate professional designation.

Tax Savings Strategy Key Takeaways

We went over six tax strategies you need to take to grow your real estate business. These six strategies will help you achieve financial freedom and grow your wealth.

Remember to:

  1. Start with the children, house, and vehicle
  2. Maximize your deductions
  3. Start a SOLO 401K
  4. Create a Self Directed IRA (SDIRA)
  5. DB(K) strategy
  6. Get a Real Estate Professional Designation

We've covered a lot of information that may include concepts that are new to you. To hear this content presented by Scott Smith check out Royal Investing: Episode #1 Tax Savings Strategies on our Wistia channel.

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.

1031 Exchange Update for 2022

Are you fed up with paying taxes on your hard-earned real estate profit? Are excessive taxes preventing you from securing your financial freedom as a real estate investor? If so, you should read further to learn more about the 1031 Exchange update for 2022.

As a savvy real estate investor, you can use this little-known tax break to increase your wealth. Once you've mastered the 1031 Exchange, you'll see an increase in your purchasing power as you keep your money working for you and not filling the federal government's coffers.

What Is A 1031 Exchange? 

First, you have to know what we mean when talking about a 1031 Exchange. In general, a 1031 Exchange is a tax provision that lets you sell an investment property, take those gains from the property, and reinvest those gains into another property without paying taxes. 

When you sell real estate and earn gains, you have to pay tax. Appreciated property means more tax when you sell. The flip side of that is true too. If your property depreciates, you are subject to depreciation recapture taxes when you sell. Those taxes apply to you whether you claimed the depreciation deductions on your taxable income or not. 

Either way, the federal government will try to extract their pound of flesh from your gains. 

The beauty of the 1031 Exchange provision is that you get to defer the taxes on your gains. That means as a real estate investor you pay no taxes when you sell your property and exchange it for a new real estate investment. If you follow the rules, you may be able to defer the taxes indefinitely as you reinvest into bigger or better properties. 

If you want to learn more about the finer details of the 1031 Exchange, we recommend that you read Understanding 1031 Exchanges And Asset Protection Entities. 

What Is The 1031 Exchange Update? 

When President Biden won the election, one of his campaign promises was to eliminate the 1031 Exchange because of the perception that it gave an unfair advantage to the ultra-wealthy. 

The Biden administration had planned on either eliminating the 1031 Exchange program or modifying it somehow. One of the planned changes was the complete overhaul of the 1031 Exchange program, but that plan hasn't come to fruition. 

The other plan included a $500,000 limit on the amount of money exchanged per year. That plan has also failed to earn widespread support.

One of the reasons the government failed to eliminate the 1031 Exchange program is that it is not in their best interest to kill it. Here's why. 

If the government were to limit the 1031 Exchange successfully, it would mean less tax revenue in the long run. In the short term, the government would enjoy the taxes from the sale of the property.

However, a limit or drastic change to the 1031 Exchange would probably chill the real estate industry. That means that more people will hold onto property to avoid taxes. When people hold

onto their properties, all the ancillary sources of tax revenue dry up. 

That means the contractors, cleaners, attorneys, real estate agents, and title companies do not participate in those deals. When you eliminate those people from transactions, you eliminate the taxes they would have paid. On balance, the federal government earns less in tax by removing or reducing the effectiveness of the 1031 Exchange benefit. 

Fewer taxes and political gridlock have prevented any significant changes from the tax code yet. However, as a competent real estate investor, you should prepare for changes, just in case. That means you should look into all tools available to you right now and take advantage of them. 

You might wonder if the 1031 Exchange is the right investment strategy for you. Answer that question by checking out Is a 1031 Investment Strategy Right For Me? 

Key Takeaways

The 1031 Exchange update doesn't take away from the fact that it still might be the right vehicle for you to avoid paying capital gains taxes. Right now, there is talk in Washington D.C. about making policy changes, but nothing has emerged from those discussions yet. 

That's not to say that nothing will happen, but a lack of support and institutional gridlock are keeping policy changes at bay. As an intelligent real estate investor, you should plan, but don't worry too much about things out of your control. 

The best thing to do right now is to use all your tools. That means finding out which real estate investment strategy is suitable for your particular and unique circumstances. 

Do you have a plan for your financial freedom? If not, let us show you how to secure your financial independence and build generational wealth to pass on to your family. 

To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.