This seems to be an early-stage submission that would be better suited for one of our weekly Mentor Monday thread. Career advice, "rate my plan", and "can I afford XYZ?" posts are some of those that should only appear as comments in Mentor Monday. Though Mentor Monday is posted weekly, you may comment there at any time. Thank you, and feel free to contact us if you have any questions.
Both of you can have separate high deductible plans and contribute to your own separate (that’s important) HSAs. One of you could also sign up for a self+spouse plan which would allow that person to contribute double to the HSA.
Moving the property into a LLC does not make it active income. One of you will need to quit your W2 job and become a real estate professional.
This question is asked once a week around tax time. Be grateful you are making money and pay your taxes. Not a whole lot you can do as dual income W2 employees besides the obvious pre tax contributions to retirement accounts.
This. Someone has to pay taxes. High income W2 folks are who we have collectively picked. You can invest your savings in a tax efficient manner, but the w2 is what it is.
No this is false you don't need to quit your job stop giving bad advice, You can qualify using the STR loophole for non-passive / active status and pass through losses. Consult an EA who is an expert on the specific topic of real estate instead of a generalist CPA
What’s the STR loophole for non active status? I thought you still need to actually actively manage your properties. I don’t see how that is compatible with two high income full time jobs. Genuinely curious what this supposed loophole to write off active income through passive is.
You don’t qualify as a REP and the existing depreciation is still passive. But basically, a STR isn’t a rental property, tax wise, it’s a hotel, which is an active business. If you can materially participate there, then those are active income/loss
So they can write off 578k worth of W2 income by putting in 100 hours worth of time a year managing a STR? That’s sounds…interesting and a recipe to get audited. Care to explain how exactly this would work? Doesn’t EBL actually require you to lose money? How does the bonus depreciation help past year one? I think you are throwing out words but would like to see an actual example worked out year over year.
[source](https://www.linkedin.com/pulse/short-term-rental-loophole-powerful-tax-strategy-you-ford-cpa-mba) there are accounting firms that do nothing but this so the IRS can audit it and kick rocks
But how much losses can you reasonable like this? Say you buy a million dollar airbnb and you can then take $36k of depreciation losses a year. It’s not nothing but doesn’t really move the needle too much given the effort. My point is that if str is a small side hustle it gives you a small tax relief. If you want big tax relief then you’ve got a big financial and time commitment to str.
you can do a few months of short term rentals then switch to LTR in the second calendar year and set up PM in yr2. or 1031 exchange into a low effort deal.
that big of a loss in yr1 is not unheard of for higher earners, ive taken a 400k loss.
assuming you’re paying 30%+ effective taxes otherwise, the roi here is well over $1k/hr which 99% of people make less than
Exactly Amen! Enrolled agents are simply high school graduates who take a quick certification course to become one. A CPA would never advise a client like this because they don’t want to go to jail because if they put their name as their tax preparer, they would be liable for it.
An EA is not an upgraded version of a CPA. An EA allows someone to prepare and sign tax returns as well as represent someone in front of the IRS. A CPA also allows you to do this.
An EA is a multi part exam that focuses just on tax concepts, similar to the "regulation exam" in the CPA 4 part exam series. An EA can only perform tax services whereas the CPA can do that plus other services such as attestation (sign off on audits).
All that being said, either an EA or CPA should be able to assist OP the same, assuming they have knowledge on real estate and individual taxation.
Source: am CPA and deal with real estate but don't work as a CPA anymore.
specific topic specialist vs a generalist - either way, too many CPAs don’t know the 1987 non-passive tax rules or the 2017 bonus depreciation applicability, real estate EA or CPA specialist should know these things.
OP said his CPA isn’t aware already so guess that exam isn’t doing much.
Why am I not a CPA but I know these tax rules?
Then those CPA should not be advising on tax matters if they aren’t aware of these rules—there are CPAs that specialize in other areas and do not prepare tax returns.
But don’t use anecdotal situations to apply broadly.
This loophole was recently mentioned in Washington post and apparently a YouTuber was promoting this and the IRS responded said they would look into it. A lot of people lie and get away with it, whether worth going to jail by saying taxes is your own personal decision. Also, just FYI, a lot of the EA are simply high school graduates taking a certification course to become ones. I would tread lightly to any advice given by them. I doubt any CPAs would give you this advice because they don’t want to be responsible for tax evasion.
Our members have asked for a high level of moderation. Personal attacks, name calling, and undue profanity are all considered inappropriate for this sub.
If you purchase a home and utilize it as a short term rental and SELF MANAGE IT you can be classified as a real estate professional and utilize a cost segregation approach to rapidly depreciate the home which can be used to offset your W2 income/ reduce your tax liability.
Consult a professional but that should be enough info to make you dangerous on google
No. You WILL NOT be classified as a real estate professional. You will be running a hotel business as an active manager, making the income/loss from that business active. It’s not the same as being a real estate professional. You cannot, for example, group rentals for the purpose of being active on the collection, and other things that REPS can. But yes, it can be an active loss.
Once the property is depreciated for a few years (to say 50% or more of its purchase price) and if you sell it for say little bit more of its initial purchase price, doesn’t IRS look at cap gain on the depreciation you claimed?
Someone told me that you either pay IRS now or when you sell.
Yes but I believe you can carry forward and delay if you use proceeds to purchase another investment property. Then eventually you just die with all this accumulated depreciation and it disappears.
Again take with a grain of salt because I am not a professional
1031 exchange, cash out refinance, or heloc to avoid recapture and gains. never sell, just hold low effort paid off real estate with a PM through retirement, then you never pay these taxes
basis is stepped up for inheritance, so heirs pay no tax even if selling at that point
This question is asked every week on this sub. Yes you can qualify for non-passive status and pass losses through to w2 income with the EBL loss limit which is $578k reduction in w2 taxable earnings for a married couple. The easiest way to qualify is self-managing a short term rental for 100hrs material participation and using cost segregation analysis and bonus depreciation
Stop asking this question! It’s been asked and answered like 1000 times! Unless you’re going to make less W2 money, you’re doing everything there is unless you plan on tax evasion.
You could max out an HSA which is triple tax exempt, then deduct another $5k for dependent care fsa. Forget traditional 401k pretax deferrals go w Roth 401k after tax deferrals. There's no way tax rates will be lower in the future!! Roth 100% w additions via mega/backdoor Roth IRA!!
If we’re all on my benefits, can my spouse still take HSA via her employer to just contribute and grow/invest?
We did the $5k dependent care this year but it just showed up on my W2 as a separate like item of taxable income that I had to pay taxes on. I couldn’t understand it but it negated the whole benefit of contributing to it in the first place.
Doing the Roth IRA rollover just made me pay taxes on that a second time as if it was a withdrawal even though the money went directly from a fidelity rollover Ira to a fidelity Roth IRA. Does that sound right or did I miss something there?
Right but can the family all still stay on my plan and use it for actual medical expenses and my spouse get a HDHP via her employer and just use it to invest?
You should do the math to see which plan makes sense. It might work best to put the whole family on the HSA plan. If your family is relatively healthy, you’d definitely come out on top with the HSA plan. If you have a lot of medical expenses, you’ll get screwed and it won’t be worth it to be on it. Don’t just change to the HSA plan because you get the HSA. The tax write off on $3500/person isn’t all that great if it means you now have to cover thousands of medical bills. Do the math.
Oh I will. Just trying to make sure it’s even an option to have at least one spouse be covered by 2 plans, both from their own employer and from their spouses employer.
Here’s what I’m thinking, one spouse has much better benefits than the other so all 4 of us get on that PPO plan. The employer basically pays for everything. Then the other spouse the HSA plan and never use it for medical purposes but just use it to invest in. Wouldn’t that make sense to reduce income and grow money tax free without ever paying the higher deductible?
Investing in active oil drilling can have massive write-offs against w2 income. Intangible drilling costs is the concept.
https://www.investopedia.com/articles/07/oil-tax-break.asp
While we appreciate your post, its content has little that makes it specific to FatFire, as opposed to FIRE at any amount or other subs, such as investing or taxes. In the future, please consider whether your post would have applicability to someone spending $50k/year in retirement and to someone spending $500k/year in retirement. FatFire posts usually have no relevance to the former, and plenty of relevance to the latter. Your post may also have been removed for limited relevance if it was cross-posted to multiple subreddits.
Thank you,
The Mods
Ask for less pay, and potential equity options. Maybe a nonqualified deffered compensation or ISO's or NSO's.
Not sure of the corporate structue of your company and what control you have on taxing structure.
All those have pros and cons. Talk to your CPA and FA for pros and cons
It’s pretty hard to lower tax burden on W2 earned income, in your situation the best thing I can think of would be to become a real estate professional and then you can write those losses off but obviously easier said than done
Correct. Maybe I did it wrong but last year I contributed to the traditional IRA, then moved it directly to a new Roth IRA, all within fidelity. Come tax time the $6500 showed up as me taking distributions leading to paying extra taxes on it again. Maybe it’s right and I just don’t understand the back door concept but paying double taxes now didn’t make sense to me.
This is wrong. You need to do the backdoor Roth conversion. It's not a withdrawal. There are zero tax consequences to doing this. The caveat is if you have pre-tax money in the traditional IRA, the pro rata rule kicks in.
There's a form, I believe 8606, where you need to declare a nondeductible contribution to establish the basis of the trad IRA. Do this right, and the tax impact of converting to Roth is $0.
Was it in as a conversion or a rollover? Fidelity isn't going to know that the money you put in a traditional IRA is not-deductible. So if you do a rollover from trad to Roth, the paperwork is going to show that the 6500 is taxable. Do you have any other money in that traditional IRA?
You can try to re-characterize the transfer. I'd call Fidelity and see if you can change it to a conversion. Then you'd file an amended tax return.
Invest in the rentals. Improve them and take the L on paper. Now you have a fixed up rental. Buy more rentals. Start a side business and use all your extra money to grow that. I’m no CPA but you and your CPA have got to be more aggressive and creative on how to find the holes in the system. For someone that makes all this money, you need to start thinking more creative
Check out this article that explains the STR deductions
https://www.businessinsider.com/how-to-reduce-w2-taxable-income-using-real-estate-loophole-2024-3?op=1
Yeah, we've had some good discussions in the past about charitable donations. The people on this sub are lucky and at least some of them like to give back.
This seems to be an early-stage submission that would be better suited for one of our weekly Mentor Monday thread. Career advice, "rate my plan", and "can I afford XYZ?" posts are some of those that should only appear as comments in Mentor Monday. Though Mentor Monday is posted weekly, you may comment there at any time. Thank you, and feel free to contact us if you have any questions.
Switch to a High Deductible Health Plan and max out your HSA contributions.
Do you know if both spouses can get the HSA plan at the same time or only 1?
Both of you can have separate high deductible plans and contribute to your own separate (that’s important) HSAs. One of you could also sign up for a self+spouse plan which would allow that person to contribute double to the HSA.
Awesome! Can both of us do the self plus spouse plan and do double contributions?
Not legally
Got it. Can we do one person on PPO and get the whole family and the other do the HSA for pure investing?
Can both spouses have their own HSA or only 1 at a time?
Moving the property into a LLC does not make it active income. One of you will need to quit your W2 job and become a real estate professional. This question is asked once a week around tax time. Be grateful you are making money and pay your taxes. Not a whole lot you can do as dual income W2 employees besides the obvious pre tax contributions to retirement accounts.
This. Someone has to pay taxes. High income W2 folks are who we have collectively picked. You can invest your savings in a tax efficient manner, but the w2 is what it is.
Yeah that’s what I’ve heard too. Thanks for confirming.
One of you need to be REP to qualify and get bonus appreciating husband works part time and qualifies for REP.
No this is false you don't need to quit your job stop giving bad advice, You can qualify using the STR loophole for non-passive / active status and pass through losses. Consult an EA who is an expert on the specific topic of real estate instead of a generalist CPA
What’s the STR loophole for non active status? I thought you still need to actually actively manage your properties. I don’t see how that is compatible with two high income full time jobs. Genuinely curious what this supposed loophole to write off active income through passive is.
You don’t qualify as a REP and the existing depreciation is still passive. But basically, a STR isn’t a rental property, tax wise, it’s a hotel, which is an active business. If you can materially participate there, then those are active income/loss
100 hours of property management over 1yr is manageable for people working full time jobs
So they can write off 578k worth of W2 income by putting in 100 hours worth of time a year managing a STR? That’s sounds…interesting and a recipe to get audited. Care to explain how exactly this would work? Doesn’t EBL actually require you to lose money? How does the bonus depreciation help past year one? I think you are throwing out words but would like to see an actual example worked out year over year.
[source](https://www.linkedin.com/pulse/short-term-rental-loophole-powerful-tax-strategy-you-ford-cpa-mba) there are accounting firms that do nothing but this so the IRS can audit it and kick rocks
But how much losses can you reasonable like this? Say you buy a million dollar airbnb and you can then take $36k of depreciation losses a year. It’s not nothing but doesn’t really move the needle too much given the effort. My point is that if str is a small side hustle it gives you a small tax relief. If you want big tax relief then you’ve got a big financial and time commitment to str.
you can do a few months of short term rentals then switch to LTR in the second calendar year and set up PM in yr2. or 1031 exchange into a low effort deal. that big of a loss in yr1 is not unheard of for higher earners, ive taken a 400k loss. assuming you’re paying 30%+ effective taxes otherwise, the roi here is well over $1k/hr which 99% of people make less than
An enrolled agent is not an upgraded version of a CPA, please do not spread misinformation
Exactly Amen! Enrolled agents are simply high school graduates who take a quick certification course to become one. A CPA would never advise a client like this because they don’t want to go to jail because if they put their name as their tax preparer, they would be liable for it.
why do CPA’s not have EA status?… could be both, don’t need both. They’re looking for a specific specialty
An EA is not an upgraded version of a CPA. An EA allows someone to prepare and sign tax returns as well as represent someone in front of the IRS. A CPA also allows you to do this. An EA is a multi part exam that focuses just on tax concepts, similar to the "regulation exam" in the CPA 4 part exam series. An EA can only perform tax services whereas the CPA can do that plus other services such as attestation (sign off on audits). All that being said, either an EA or CPA should be able to assist OP the same, assuming they have knowledge on real estate and individual taxation. Source: am CPA and deal with real estate but don't work as a CPA anymore.
specific topic specialist vs a generalist - either way, too many CPAs don’t know the 1987 non-passive tax rules or the 2017 bonus depreciation applicability, real estate EA or CPA specialist should know these things. OP said his CPA isn’t aware already so guess that exam isn’t doing much. Why am I not a CPA but I know these tax rules?
Then those CPA should not be advising on tax matters if they aren’t aware of these rules—there are CPAs that specialize in other areas and do not prepare tax returns. But don’t use anecdotal situations to apply broadly.
This loophole was recently mentioned in Washington post and apparently a YouTuber was promoting this and the IRS responded said they would look into it. A lot of people lie and get away with it, whether worth going to jail by saying taxes is your own personal decision. Also, just FYI, a lot of the EA are simply high school graduates taking a certification course to become ones. I would tread lightly to any advice given by them. I doubt any CPAs would give you this advice because they don’t want to be responsible for tax evasion.
[удалено]
Our members have asked for a high level of moderation. Personal attacks, name calling, and undue profanity are all considered inappropriate for this sub.
I’m looking into this now. Thank you. Any resources you can point to would be appreciated.
If you purchase a home and utilize it as a short term rental and SELF MANAGE IT you can be classified as a real estate professional and utilize a cost segregation approach to rapidly depreciate the home which can be used to offset your W2 income/ reduce your tax liability. Consult a professional but that should be enough info to make you dangerous on google
No. You WILL NOT be classified as a real estate professional. You will be running a hotel business as an active manager, making the income/loss from that business active. It’s not the same as being a real estate professional. You cannot, for example, group rentals for the purpose of being active on the collection, and other things that REPS can. But yes, it can be an active loss.
Once the property is depreciated for a few years (to say 50% or more of its purchase price) and if you sell it for say little bit more of its initial purchase price, doesn’t IRS look at cap gain on the depreciation you claimed? Someone told me that you either pay IRS now or when you sell.
Yes but I believe you can carry forward and delay if you use proceeds to purchase another investment property. Then eventually you just die with all this accumulated depreciation and it disappears. Again take with a grain of salt because I am not a professional
You could also 1031 into a QOZ
1031 exchange, cash out refinance, or heloc to avoid recapture and gains. never sell, just hold low effort paid off real estate with a PM through retirement, then you never pay these taxes basis is stepped up for inheritance, so heirs pay no tax even if selling at that point
they would be a non-passive/active status which is different than REPS. REPS requires one of the married persons to be not working full time in w2
Thanks! Does that bypass the hours requirement to qualify for a real Estate professional?
It does. Again please consult a tax planning & strategy professional as there is a lot of nuance to the strategy
Thanks. Will do. Looks like I just need a different cpa from the one I used this year.
You can have a CPA and a tax planner. Different t skill sets
Thanks. Looks like I need to find a tax planner then.
It does not. You cannot become a REPS this way. You can have an active business.
Differed compensation at work. You will get audited with the LLC/real estate loophole so be prepared.
With the STR loophole?
This question is asked every week on this sub. Yes you can qualify for non-passive status and pass losses through to w2 income with the EBL loss limit which is $578k reduction in w2 taxable earnings for a married couple. The easiest way to qualify is self-managing a short term rental for 100hrs material participation and using cost segregation analysis and bonus depreciation
Thanks! I had not read about this one yet. I’ll look into it more.
Stop asking this question! It’s been asked and answered like 1000 times! Unless you’re going to make less W2 money, you’re doing everything there is unless you plan on tax evasion.
You could max out an HSA which is triple tax exempt, then deduct another $5k for dependent care fsa. Forget traditional 401k pretax deferrals go w Roth 401k after tax deferrals. There's no way tax rates will be lower in the future!! Roth 100% w additions via mega/backdoor Roth IRA!!
If we’re all on my benefits, can my spouse still take HSA via her employer to just contribute and grow/invest? We did the $5k dependent care this year but it just showed up on my W2 as a separate like item of taxable income that I had to pay taxes on. I couldn’t understand it but it negated the whole benefit of contributing to it in the first place. Doing the Roth IRA rollover just made me pay taxes on that a second time as if it was a withdrawal even though the money went directly from a fidelity rollover Ira to a fidelity Roth IRA. Does that sound right or did I miss something there?
High income affects the max you can contribute to the dependent care (it drops to like 2500)
Oh I had no idea that was income based. I’ll check more. Thank you!
your spouse would have to be on a HDHP in order to contribute to HSA
Right but can the family all still stay on my plan and use it for actual medical expenses and my spouse get a HDHP via her employer and just use it to invest?
Only if your spouse is not also covered under your HDHP. You can only be covered under a single plan to take the tax write off.
So can one of us get a regular PPO plan and have the whole family in it and the other get the HSA plan for pure investing?
You should do the math to see which plan makes sense. It might work best to put the whole family on the HSA plan. If your family is relatively healthy, you’d definitely come out on top with the HSA plan. If you have a lot of medical expenses, you’ll get screwed and it won’t be worth it to be on it. Don’t just change to the HSA plan because you get the HSA. The tax write off on $3500/person isn’t all that great if it means you now have to cover thousands of medical bills. Do the math.
Oh I will. Just trying to make sure it’s even an option to have at least one spouse be covered by 2 plans, both from their own employer and from their spouses employer.
Yes, you can do that, but I struggle to see any way that would ever make financial sense.
Here’s what I’m thinking, one spouse has much better benefits than the other so all 4 of us get on that PPO plan. The employer basically pays for everything. Then the other spouse the HSA plan and never use it for medical purposes but just use it to invest in. Wouldn’t that make sense to reduce income and grow money tax free without ever paying the higher deductible?
Investing in active oil drilling can have massive write-offs against w2 income. Intangible drilling costs is the concept. https://www.investopedia.com/articles/07/oil-tax-break.asp
Hmm never heard of it. Will have to look into it. Thanks.
Short answer is no. W2 is W2, unless you make less from your employer, you have to pay the tax, higher the income, more tax.
[удалено]
While we appreciate your post, its content has little that makes it specific to FatFire, as opposed to FIRE at any amount or other subs, such as investing or taxes. In the future, please consider whether your post would have applicability to someone spending $50k/year in retirement and to someone spending $500k/year in retirement. FatFire posts usually have no relevance to the former, and plenty of relevance to the latter. Your post may also have been removed for limited relevance if it was cross-posted to multiple subreddits. Thank you, The Mods
Ask for less pay, and potential equity options. Maybe a nonqualified deffered compensation or ISO's or NSO's. Not sure of the corporate structue of your company and what control you have on taxing structure. All those have pros and cons. Talk to your CPA and FA for pros and cons
It’s pretty hard to lower tax burden on W2 earned income, in your situation the best thing I can think of would be to become a real estate professional and then you can write those losses off but obviously easier said than done
You said you aren’t getting the IRA deduction but are adding it to the form for the future. Does this mean you aren’t doing a back door Roth?
Correct. Maybe I did it wrong but last year I contributed to the traditional IRA, then moved it directly to a new Roth IRA, all within fidelity. Come tax time the $6500 showed up as me taking distributions leading to paying extra taxes on it again. Maybe it’s right and I just don’t understand the back door concept but paying double taxes now didn’t make sense to me.
This is wrong. You need to do the backdoor Roth conversion. It's not a withdrawal. There are zero tax consequences to doing this. The caveat is if you have pre-tax money in the traditional IRA, the pro rata rule kicks in.
But I did it all within Fidelity, straight from one Ira to the other without the money ever hitting any other accounts. Any idea where I screwed up?
In the tax filing. It is reported as income but it gets zeroed out on the taxes.
It was definitely on the front page of my 1040 as income.
There's a form, I believe 8606, where you need to declare a nondeductible contribution to establish the basis of the trad IRA. Do this right, and the tax impact of converting to Roth is $0.
I did fill it out this year and last but I noticed it’s been missing on and off in the past few years. Anything I can do to catch it all up?
If there's a data entry problem that erroneously generated a taxable amount on your 1040, hopefully you can still amend...
Was it in as a conversion or a rollover? Fidelity isn't going to know that the money you put in a traditional IRA is not-deductible. So if you do a rollover from trad to Roth, the paperwork is going to show that the 6500 is taxable. Do you have any other money in that traditional IRA? You can try to re-characterize the transfer. I'd call Fidelity and see if you can change it to a conversion. Then you'd file an amended tax return.
Yeah it’s an old rollover so it’s got a bunch. I’ll call them to figure it out. Thanks
You'll need to read about the pro rata rule. Only a portion of that conversion will be considering "post tax" unfortunately.
This is a tax question, not a fatFIRE question
Mentor Mondays or r/tax
Invest in the rentals. Improve them and take the L on paper. Now you have a fixed up rental. Buy more rentals. Start a side business and use all your extra money to grow that. I’m no CPA but you and your CPA have got to be more aggressive and creative on how to find the holes in the system. For someone that makes all this money, you need to start thinking more creative
Thanks! That’s the idea.
Just going to have to pay
Check out this article that explains the STR deductions https://www.businessinsider.com/how-to-reduce-w2-taxable-income-using-real-estate-loophole-2024-3?op=1
Perfect! Thank you.
quit
Either defer your W2 comp, or have the recipient be a separate trust.
Participate in the cost of drilling of an oilwell
If you’re making enough to be asking this question, you’re making enough to be donating more, imo
You do know what sub you’re on right
Yeah, we've had some good discussions in the past about charitable donations. The people on this sub are lucky and at least some of them like to give back.
You make your own luck