Bulletproof Asset Protection Workshop

Presented by Attorney William Bronchick

Real Estate
Tax
Reduction
Strategies
Types of Real Estate Income
• Passive Income – Rentals, Interest
Ordinary tax rates, no FICA tax
• Earned Income – Wholesales, Flips
Ordinary tax rates, subject to FICA tax
• Long-Term Capital Gains
Maximum 20% rate, no FICA tax
When Selling Property
• Capital Gains Tax on Sales Proceeds over tax basis
at 10-20% rate (depending on your tax bracket)
• Recapture of Depreciation – 25% rate
1031 Exchange
• Instead of Selling and Paying Taxes, Exchange for another “Like-
Kind” Asset (basically any kind of real estate interest, but NOT an
LLC membership)
• Must use an exchange intermediary to receive the proceeds from
the sale
• Identify up to three replacement properties within 45 days
• Have 180 days to close on the replacement(s)
• Defer taxes on the first sale; keep exchanging up
• Best strategy – DIE and wash it all clean!
RE Tax Professional Designation

What’s the
Big Deal?
Depreciation
• “Paper” tax deduction against income from
property.

• Real estate consists of land + improvements

(structure). Land is not depreciated, but
improvements are, even though the package
generally APPRECIATES in value.

• Depreciation for residential – 27.5 years; for

commercial property, 39 years.
Real Estate Losses
• Losses are an accounting “trick”; you may not
actually be losing money.

• Losses from rental real estate are generally

considered “passive”; thus can only be used to
offset passive income from other sources, or
rolled forward.

• Limit of losses is $25k per year if you make $100k

or less, and is phased out once you hit $150k in
AGI.
Example
• Buy house for $500k

• Land value = $100k

• Income – expenses = $10k/year

• Depreciation = $12k/year

• Net loss for tax reporting = - $2k

• Use to offset other passive income from real estate,

k-1 income, etc.
The Problem…
• If your AGI is too high, you can’t use losses against
other income.

• Even if your AGI is $100k or less, your limit is $25k

in passive losses to deduct against other passive
income.

• To qualify for taking the losses, you must be

“actively participating” (making management
decisions) for the property (using a property
manager does not automatically disqualify you,
though).
Solution: REP Designation
• Having the REPS status eliminates the $25k
loss limitation AND allows you to use passive
losses against other passive or ACTIVE
income!

• Thus, you can be making a net PROFIT on your

rentals, AND wash away the tax liability from
your job salary, business, or 1099 income!
How to Qualify
• You spend 750 hours a year in “real property
trades or businesses.”

• It is more than 50% of what you do during the

year.

• You are “materially participating” in the rental

activity you are trying to deduct losses on.
750 Hour Rule
If does NOT have to be 750 hours in the rental
business. The following activities qualify (among
others):

Construction Reconstruction
Acquisition Rental
Operation Management
Leasing Brokerage

Note that all of these activities involve “working,”

not “investment” (e.g., education, searching for
The 50% Rule
• Your rental activity was 50% or
more of your work during the
year.

• Hard to justify if you have a full-

time job or other business
Material Participation Rule
• You/spouse participated > 500 hrs/yr, or

• Your participation was substantially all the

participation in the activity, or

• Four other complicated tests not worth mentioning if

you want to stay awake, or

• Based on all the facts & circumstances, you

participated in the activity on a regular, continuous,
and substantial basis during the year.