Most people know that there are tax advantages to being a real estate investor.

Some of the most common are:

  • Depreciation Deductions for Real Estate Investors
  • Deducting Mortgage Interest and Property Tax
  • Deducting Repairs and Maintenance Costs for Immediate Tax Benefits
  • Leveraging 1031 Exchanges for Capital Gains Tax Deferral
  • Understanding Capital Gains Tax Rates on Long-Term Investments
  • Using Cost Segregation to Accelerate Depreciation Deductions
  • Offsetting Other Income with Loss Deductions from Rental Properties

All investors get these benefits but full-time investors get additional benefits if they qualify for the IRS Real Estate Professional Status (REPS). To qualify, individuals must dedicate more than 50% of their time to real estate trades or businesses while providing at least 750 hours of annual service.

The main benefit of this status is that investors are no longer capped at the amount of losses they can use to offset their active income.

For example, let's say you have a full-time job as a consultant making $200,000 per year and you own 5 rental properties. Across all your properties, you accumulate $50,000 in losses. Since you are not a full-time investor, the $50,000 in losses cannot offset your consulting income. But if instead of being a consultant, you are a real estate investor who spent at least 750 hours working on the business, then all $50,000 of those losses can offset your active income.

By combining losses and all of the deduction opportunities mentioned above, many real estate investors can get the modified gross adjusted income on their tax return close to $0. This means that in the eyes of the IRS, they essentially made no money and are not required to pay taxes. This is a huge win for many people.

Most people stop there and don't realize what other impacts a modified gross adjusted income of $0 can have for you and your family. Let me tell you about two ways to leverage this to your advantage.

Health Insurance Options for Real Estate Investors

My wife recently quit her W2 job as a speech pathologist for a hospital to start her own business. When she still worked there, we got health insurance through her job. It cost us $1,000 / month.

Once she quit, we had to find private health insurance since I am also an entrepreneur. Using the strategies mentioned above, I used my rental property deductions and Real Estate Professional Status to get our modified adjusted gross income down to $0. So when we applied for private health insurance, I stated that my income was $0.

This allowed us to get a massive discount. We bought the same EXACT health insurance for only $125/month. Same deductible, access to the same pediatrician, and access to the same specialists.

That's over $10,000 in annual savings!

Managing Student Loans with Real Estate Income

Last week I spoke with a high income earner making $200k+ per year. He has multiple rental properties and qualifies as a Real Estate Professional. The depreciation from his properties will fully offset his active income to get him close to a $0 modified adjusted gross income.

One of his kids is graduating high school this year and looking at colleges. As part of the application process, he is also applying for financial aid and student loans. The review process for these applications assesses need based on the parent's modified adjusted gross income.

Given this individual's income was essentially $0 last year, his kid has a high probability of receiving financial aid that he wouldn't have been eligible for based purely on the gross income.

These are just two examples where real estate benefits go beyond just tax savings.

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Thank you for reading. Please reach out and let me know what resonated with you. I read every email!

Cheers,

Sean

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