How To Avoid Taxes (Legally) as a Real Estate Investor 

BP was one of the influences that led me to start real estate investing, along with Ken and Robert. Im halfway through the process of my first purchase. Found a overly leveraged landlord that needed to sell urgently and cheaply. Soon having an apartment rented to nurses by the room near my city's hospital which will cashflow HALF of what I currently earn at my job. This started out as me just devouring hours of videos and books from all of you authors and thinking about real estate 24/7 for a year while saving money for first investment. Grind, grind, grind !!! Wish me luck guys !

It would be amazing to have him come back and have a less experienced buyer interview him so the information will be more understandable and easier to relate to. The video was very informative and great.

Such a valuable episode!

I retired 21 years ago at 45. I didn't have a pile of money and had no plan to retire. I was a software engineer working at startups and had one pay off a $100k so I decided to take off work and develop my own app to sell. My plan was to go back to work when the money ran low. I absolutely loved writing code and creating consumer apps. But wanted to create my own app. This was when the web was starting out so there wasn't a lot of social media or info on "retiring early". A strange thing happened...the money lasted much longer than I had imaged. I also got into gardening and playing basketball which was fun. I owned my home in San Jose CA with a $2200/mo mortgage payment. I could see without that mortgage payment that wow my expenses were really low. So I fixed up that house (had to refi with no doc loan) and sold for a $400k profit. Moved to Phoenix bought a house for $305k, sold that 6 months later for a $60k profit (just before the crash) and bought a $265k house closer to central Phoenix. Bought a second house in central Phoenix for $200k during the crash. Basically I've lived off cap gain on houses I lived in. I try to buy dumps in OK areas and I fix them up, sell, repeat. I do all the work myself, another hobby. I generally keep the cap gain below the $250k tax free limit ($500k when I was married). So my taxable income over 21 years has been below the limit needed to file so I don't even fill out Fed or State income tax forms. Weird feeling. I don't invest (other than my home) because I suck at investing and it's a job I don't like. So no income from investments. $0 income triggered qualifying for Medicaid so $0 health care costs. I loved Medicaid. No stress having to pick an insurance company, everything is paid for, no co-pays. Medicaid only considers income, not wealth. That saved me a lot of money. Then I found out because I was on Medicaid I could also get a smartphone and data plan for free (Lifeline). My average spend in the past 10 years has been $600/mo. Crazy right? I self insure my home, don't heat in winter, hot water heater off in summer, no clothes dryer, eat Keto so limited diet (never eat out). $600 includes everything including $100/mo for property tax. I love living simple. I don't have cable TV or even a couch. It's been a strange trip. There are options to retire early, not pay income taxes. I get no one believes any of this is possible. 21 years ago I wouldn't have believed it either. Today I'm fixing my remaining central Phoenix home to sell later this year or spring 2023 and moving to SE Asia. As a 65 year old single white dude it's pretty cool I'll be able to date/marry a very young attractive woman who will be a great wife. I can even have kids and have the funds to make sure my kids get through college. No sure I will, but pretty sweet option to have. The one tip I have is how important marriage is to any financial plan a person has. The biggest risk to retiring early for example is divorce. Never hear that mentioned. When there's a big pile of money people can start seeing being divorced as a way to get more control over that money. Also I couldn't live the way I do, and want, while being married. Chances of find another person to live like this is pretty much impossible. I'm not against marriage, only marriage in the US and most western countries. It's a bad financial contract.

40:00 Depreciation is magic 50:00 LLC facts

I’m about 3/4 through Tom’s book! Great content! Thank you!😊

Thank you for making this episode, I have been rambling in my mind about what I should do about my goals with taxes. Now I will have less questions for my CPA...

Love this. More tax and insurance strategy shows. Thanks for the hard work, BP!

Love this show. For years, many BP shows focused on "20 doors in 1 year" type of stories. Not much on financial side of real estate investment. It is nice change to see!

Tom W is a master mind on taxes. Great learnings from his books and this discussion

Thank you Tom W! Thank you for educating and sharing us your passion.

I’m constantly battling my Dave Ramsey investor friends (in a friendly way) and looking forward to sharing his quote: “If you are afraid of debt then what you are your really afraid of is the asset not performing financially.” Stew on that for a little bit.

Great information! He's simplifying the situation with the amazon like deals around the country, for example in WI the state actually paid Foxconn to build there, it wasn't just a reduction in taxes. The benefit to the communities that pay large companies to move in are highly contested.

Ah! I get this now. When I was 35, I used credit cards to renovate a home, and buy a car (for business only, not pleasure). My method would have worked, except I did not have any financial education. And yes, my asset did not cover my expenses, I did not know about CAP rates. I did have to go bankrupt, but in the process I learned from my mistake, and today I have an amazing spending plan, where I can document my money movement. I can definitely now see that using credit would have helped me build wealth, but I just didn't know how. Buying and hold makes sense, but only if a person understands all of the expenses to run a property (plus emergency funds should be calculated into that equation, me thinks).

Really good information! I took pages of notes and now I have so much information I have to act on.

Love these solo deep dive discussion with David with guests or with QA. So informative, engaging, and enlightening.

Wow! Great podcast! Lots of great take-always and nuggets of insight.

This is one of the best information on the tube!

It’s a real education ..awesome learning

Thank you for this invaluable content 🙏

Phenomenal info! Thank you guys!!

Tom is great CPA, i register his website to learn more on my tax preparer practice already

Amazing information, THANK YOU

Excellent Podcast episode. Mini-course on Real Estate investing all in one package. A question I have for Tom Wheelhouse is whether using Statutory Trusts (Wyoming, Nevada, etc) for each rental property, held within one LLC (From a state that has a charging order only for creditor remedy) would protect one property's claims from each of the others and the LLC protecting all properties from an outside/personal or other claims?

I absolutely love bigger pocket. The information they give is priceless!! I’m working to start my real estate journey. the more I listen the more confident I get!. I’m really glad I stumbled across this content. Life changing!

Hi David: great show. We have a few rental properties that are paid off, under an LLC. Understand it’s dangerous if get sued. But how do you get mortgage for an LLC? Mortgage companies wouldn’t lend to an LLC. Thanks Susan

You guys are both incredible great job guys

Excellent video thanks for your time

Amazing episode! Speaker is very intelligent and clearly explain all questions

This is awesome! It has opened my mind and eyes to adjust my strategy going forward🙏Thank you so much!!

This is great. My question is: How do you create loss through short term rentals when the goal is cash flow? What am I missing? Depreciation can help...but not very significant.

Great content! Thank you

This actually saved me. I love my W2 work and have my 2 businesses built on outsourcing and VA. My problem is my 2 businesses are now gaining profit more than my W2. My initial plan was I need to invest in short term rental to take advantage of depreciation for my active businesses. It turned out, what I was doing is correct. My 2 businesses are already passive since I just audit and create systems which just requires 2 hours a week - less than 100 hours in a year. Turn your active income to passive income. Invest passively in Real estate and take depreciation losses on the profits in the passive income. Thank you!

Great information, thank you so much for sharing it with us!!

Thank you so much for this content

What an incredible episode!!! I hope you guys do more podcasts like this. Some episodes with hard money lenders would be nice too.

Thank you for sharing

Love the comment on hire professional to do it .. I can really feel it as I worked in IT consulting. Unfortunately most real estate agents are not giving their 100% effort - especially when they are the seller agent. I sold my house in 2021 at market price with no mark-up and the agent that I used did not help much to drive traffic nor getting better offer. I might be able to sell it for same price thru sale-by-owner and save the 3% commission.

Thank you both ❤

Just found your channel and I’m so glad I did cause I’m interested in investing in real estate and I had no idea where to start. Thanks so much for this invaluable content.

Thanks for having Tom W. on this helpful informative tax strategies podcast he dished out alot of meat and potatoes keep the gems coming .

Thank you for keeping the interview on topic and providing the most information in the shortest time. My time is super limited and you are providing a valuable video. I am becoming a subscriber!

Fantastic conversation!

So Much KNOWLEDGE! Great video

One of the best videos I’ve watched on this channel. So much info! Thank you 🙏🏾

Love it , sooooo good ( great video)

Really loving your videos

Awesome information 🔥💪🔥

Great information.

Thank you ❤

Man Tom is awesome he makes just about every other tax person seem subpar. I read his book a while back and was shocked when I spoke to several tax attorneys and accountants who knew nothing about it or what’s discussed in the book. 😢

Excellent content

Tom mentioned an online/DIY cost segregation tools for single family houses we could use. Anyone have more info on this or specific links they can reference?

Thank for being a Segway from the professionals to us cuz I NEED these analogies and clarifications!!!

Thanks for sharing

Hi David. Thanks for sharing this information. I am thinking about investing in a 37 unit JV out of state. All 6 partners have a percentage of ownership, voting rights, sign on the loan and an active role. My role would be to prepare and update the financials. Would the hours spent in this role count towards material participation? Thank you!

This was amazing info!!!!!

Nailed it!!

Fantastic episode!

Thank u

Tom Excellent as always

How do you go about calculating the value of the property versus value of the land when determining standard straight-line depreciation? Also, for example, let's say I bought a property in January 2022 for $775,000 but I put $750,000 into renovations on the property and furnishing, designing, etc. but it took until October 2023 to complete the project. Does the 27.5 straight-line depreciation start this year at the new value of the property or does it start at the purchase price? This is a real example of an active Airbnb. Please advise.

I HAVE WAITED SO LONG TO HEAR THIS!!! Yayyyy!!!!

If you have long term capital gains from stock or crypto can you buy a property and do cost segregation to deduct you gains?

I love the idea of taking active income to passive. If you own a rental property and have a rental company manage it for you, would that count as passive because you personally spend less than 500 hours on it?

Have you’re own business! Let’s talk amazing products and services! Great video BP!!

Great knowledge! Thank you for the video guys!

Thank you for an amazing guest and great advices!

I recommend everyone read his book!! It changed my outlook on business! 🔥👍🏼

Great Information

Tom is a "flipping genius"(to mix youtube metaphors) in explaining taxes, it's amazing. Great video from experts in tax and real estate.

Can a second owner of the house take 27.5 year depreciation if the first owner already used this option? And one more question if anyone would care to answer. David mentioned that his paid off properties were sitting ducks for scammers who knew how to abuse the title companies system to take over the ownership of the paid off property to sell it fraudulently to unsuspecting buyer. How to protect such paid off properties if one doesn’t want to put another loan on it? What are the steps and ways to protect our paid off real estate? Thank you for the great content in each and every video you produce here.

Great guest, thanks Tom and David!

Really Good Information! Thanks

Brilliant!!

i just purchased a $1.5 million off-market seller-financed 7-unit apartment building in Phoenix, Arizona. I'm gonna look into having a cost segregation done and using bonus depreciation & if it makes sense for my situation... My other 30 units of multi-family consist of 4 plexes, a 6 unit & 1 acre of land and I never looked into it because I always thought they were too small of buildings and purchase price has anyone else ever done a cost segregation or used bonus depreciation? Was it worth it? Thxs for Sharing!

A very interesting point. I am a CPA and serve many business owners. The ones that buy real estate for their company (and for investment) are head and shoulders ahead of others who don't.

We have 4 rentals in the same LLC (no loans). So we purchased a 3 million unbrella policy.

In the control everything segment what if you don't have the intention to become passive in your self-employment business for instance I'm going to run a service based business teaching meditation I'm going to continue to do that I'm not going to step out and abdicate that so it's a bit confusing your guest would Define terms for people like me that don't have I'm working understanding of the tax law and lingo. Thank you!

I will definitely start reading after watching this video.

Another great podcast episode, thanks for sharing this one

Does working as a real estate photographer and/or real estate stager qualify as real estate professional hours according to Tom? Thanks

Can I write off the interest on a seller financed property?

The depreciation is basically the "wear and tear" of the property. Awesome knowledge! 👌

OK, my Accountant told me not to get an LLC even though I have three rental properties because he said that my insurance will cover any damages as well as my umbrella policy. What do you have to say about that? That may be confused that having an LLC would be redundant and maybe not necessary if I have a $2 million liability policy.

Can I write off the depreciation of a

Best podcast ever

What if fail to make the llc payments to the state? What happens to the llc ownership of the property?

David mention you start with your team to raise fund to buy luxury house for Shortterm rental, can I have more information how to join?

Favorite episode ever

Lol the king of analogy has met his match! 😂

I cant seem to find anything about the Section 469 C7 Election on the IRS website. Any links you can share?

So much new information that my brain can’t catch up. I have to watch and rewatch 😳

24:23 - why we are never going to have a loss if you use your equity? Can someone explain?

This should have 1million + views

depreciation is 27.5 years for residential and 39 years for commercial property. For a Cost Seg study hire a reputable firm (has engineers, accountants working in the firm). the same as you would for a 1031 exchange, you want a qualified intermediary in place.

I ordered Tom'sbook tax free wealth months ago, however, I didn't get a chance to read it yet. I will definitely start reading after watching this video. This is valuable information especially the tax codes for property investors!!

Hi David and Tom, I love this video.., actually I love all Bigger Pockets videos, I am starting to invest in real state and would like to ask if you can guide me were to go to get a tax specialist or accountant, CPA so that I receive professional help. Tom, Does your firm has offices in Michigan, I live in Michigan and would like to be guided by you.

I bought a Rv the debt was 9,000 last year the money made from Rentals 23,000 ! I made money from the debt , so a RV can make money 💰, and I got to use the rv 4 different trips . It’s a win win

as a long time full time real estate investor I don't totally agree with them on the just hire a professional for everything and don't try and do it yourself except basically signing the papers to buy property or refi. obviously I wouldn't do my own taxes for instance. but as an example I do think you should manage your own properties for a while when you're new, and get a lot closer to the construction then you're comfortable with (if you're rehabbing) as well. things like that. because if you don't you just won't be as strong later, that's just a fact that people don't want to hear because it's scary. of course on shows or at seminars they tell newbies to hire everyone to do everything, partly because guess what thier "other" businesses are besides real estate investing, where most of thier money comes from. those services of course.