I appreciate the existence of tax breaks but navigating loopholes feels dangerous. How can I ensure I'm taking advantage of tax-advantaged investment structures without potentially encountering unintended consequences?
Loopholes can be tricky, but there are plenty of proven tax-advantaged structures. IRAs and employer-sponsored retirement accounts are great options. You can also explore tax-efficient investment vehicles like municipal bonds or index funds. These offer benefits like tax-deferred growth or tax-exempt interest. Talk to your financial planner about these options.
Yeah, planners could make a lot of difference, particularly in a market such as this. Bonds are pretty unstable at the moment, but if you do the right math, you should be just fine. Bloomberg and other finance media have been recording cases of folks gaining over 250k just in a matter of weeks/couple months, so I think there are a lot of wealth transfer in this downtime if you know where to look. I have been using an FA since 2020, and I return at least $30k ROI, and this does not include capital gain.
I work with Sonya Lee Mitchell as my fiduciary advisor. Simply look up the name. You would discover the information you needed to schedule an appointment.
I’ve done research over the past year so I already knew this but the way you explained it made it so much easier and would have saved me countless hours if I saw this first. Keep crushing it brother!
The “excess business loss” rules in IRC 461(l) were amended by the CARES Act in 2020. These rules prevent you from using business losses from pass through entities (partnerships, s-corps, LLC’s, sole proprietors. Etc.) to offset W-2 income. It does not matter how active you are. If you exceed the income threshold you cannot offset W-2 income with business losses.
@@zakshuman8450 IRC 461(l)(6) says that the excess business loss rules shall be applied after the limitations of IRC 469. IRC 469 is where the passive loss rules are codified and includes the “real estate professional rules”. The excess business loss rules are generally agnostic to the income type. The only exclusion to the excess business loss rules I know of is certain farming income/losses for certain years. For a single taxpayer the most business losses you can uses in a year is $250k (plus a little for inflation). So if you have a 500k W-2 and a real estate or other business loss of 500k, you would still owe tax on 250k. This is the w-2 income minus the maximum business loss (250k for single for 500k for married filing jointly). Any excess loss is carried forward as a net operating loss which has other limitations in subsequent years.
@@paulmorrow8372 but this only applies to those owing over $250k on W2 taxes correct? If so everyone under that threshold should still be able to do what the guy in the video is explaining.
WELL ACTUALLY ERASING 250K OF YOUR W2 INCOME NOT 250K OF TAXES, ALL DUE TO THE BUSINESS LOSSES GAME. BUT WHAT THIS GUY IN THE COMMENTS IS SAYING REALLY HAS NO REAL RELEVANCE WITH 99% OF THE POPULATION. THIS 250K LIMIT I’VE NEVER EVEN HEARD OF IN MY 7YRS OF DOING THIS, SO I HAVE TO LOOK INTO THAT TO SEE IF ITS BOGUS OR NOT. NOW EVEN IF IT WERE TO BE TRUE THAT YOU COULD ONLY WRITE-OFF $250K OF W2 INCOME FROM BUSINESS LOSES, THAT’S NOT INCLUDING THE OTHER WRITE-OFF’S THAT’S NON BUSINESS RELATED. YOU CAN VERY WELL WRITE-OFF ANOTHER $100K IN NON-BUSINESS REALTED WRITE-OFF.’S AGAINST YOUR W2 INCOME. AND WIPE OUT $350K OF W2 INCOME. THEN YOU COULD START AGAIN WITH YET A 2ND SEPERATE BUSINESS WITH WRITE-OFF’S. AND ON AND ON AND ON…. THE THING IS YOUR ALSO NOT PAYING ANY TAXES ON THE BUSINESS INCOME IN ADDITION TO THE W2 INCOME. AND EVEN IF YOU DO WIND UP PAYING ANY TAXES ON THE W2 INCOME, THE OVERALL TAX SAVINGS WOULD BE ASTRONOMICAL IN COMPARISON TO THE NONSENSE TAX THAT YOU’D PAY.
I spent 10 years in the consulting practice of a large accounting firm. I am not saying this video is wrong, but one BIG thing this video does not mention is that the depreciation taken lowers your basis in the asset. When you sell the asset you now have a higher gain and pay more taxes. There is something called 1250 recapture which taxes that portion of the sale at higher rates than normal capital gains. You CAN benefit from the rate arbitrage between ordinary losses and 1250 gains, but because depreciation was taken more gain will be recognized later and at a higher rate.
@@samuelhartzog7209 and then you might avoid taxes, but spend a mountain of money on an army of attorneys and title companies to draft and perform all of this. And 1031 doesn’t eliminate anything, just kicks the can a little farther down the road.
I am only 17 and turn 18 in a few weeks. Have learned so much from you and can't wait to start using all the information you have taught me. In the future I plan on being one of your clients.
Buy a duplex, triplex, etc as your first home. House hack. Live in one side and rent out others. This will allow you to save money for another property. Rinse repeat. Wish I did it long time ago.
@@KayakDIY bad advice. Duplex comes with a lot of headache with maintenance and tenants especially if they don’t like each others. Single homes in good neighborhoods is the best. Don’t ever invest in the hood. You can also buy distressed homes and fix them ( but if you don’t know what you are doing contractors might still money from you). I now buy ready to use and do minor works.
There's limitations to all of this tho. Your tenants have to be less than 7 days on average (essentially must be airbnb or the like). I'd also assume that you can only depreciate an item in your home once. Meaning if you depreciate over a short number of years, after those years have passed, you can no longer claim a loss every year. How many airbnb rental properties truly have 200k per year of itemized depreciation as in the example? This video is a good concept but only applies to a small subset of people and most likely does not generate as large of a tax write off as the example implies
It's not bad advice but the original comment is correct.. this will work in year 1. Once you've done the cost seg you need a new property to do it again. Also, the STR is work. And much riskier than owning a straight up rental which would be considered passive.
such a legend. man the tax code was invented for us to utilize not fear. thank you for doing your research and delivering to us. the value you bring with every video is enormous. Thank you Karlton
I have a very experienced CPA, have for years. I showed her this video. And she smiled. The only question that came out of her mouth was, a $200,000 loss? When would that happen? you’re certainly not going to consecutively have a loss on a house of $200,000 every year. So is the game to stay under that seven days occupancy and make the house a failure?. I don’t think you define clear enough if the rental property should be successful, or it should be a complete failure for the tax write off. Because if you’re running a normal even mediocre short-term rental you’re not going to have a $200,000 loss. So is the goal to buy a property not to make money and only to use for a tax write off? I think it’s important you tell people this isn’t a situation for everyone. I know you have another videos but in this video and others I would make sure people understand that you just don’t go out and buy a property and automatically get a right off. It isn’t that easy. You have to work at that house to be a failure if that is what you’re trying to accomplish. And then the question becomes what am I really saving if the house is a failure? like the concept understand the legality‘s and the tax, but I’m completely missing the real world example here.
Karlton is introducing the concept while promoting his business. My take-away is that loss from short term rental is not passive loss and that can offset our W-2 income. $200K loss from STR is ... misleading, even if cost seg. is applied. Thanks for sharing your thoughts. Karlton did a good job overall.
I have never wanted to yell at a RUclipsr this much while watching. He is nothing but a snake oil salesman. As if our goal is to lose money. We are not investing to lose money, we are investing to make money. Also, I can’t believe he said W-2 employees work 8 thousand hours per year.
I’ve listened to a lot of financial advice on RUclips. This is the best. No BS, no repackaging obvious facts as insightful. This is just great stuff and 100% useful and not obvious.
You are the ONLY one who makes this look like fun. In the middle of filing taxes right now and I feel like I got some really valuable information from this video. Thank you so much. ☀️
Karlton I’m a cost segregation study provider and this is the best video I’ve seen that accurately defines cost seg while also showing the tax benefits to be found in real estate.
@@ericboco3029 This type of LLC is a disregarded entity when it comes to taxes, so it doesn't make any difference in terms of tax strategies. So the decision about whether to hold your properties in an LLC would be based on whether you might get at least some partial liability protection from having it in an LLC. (I'm a tax professional, but not a lawyer.)
Some economists have projected that both the U.S. and parts of Europe could slip into a recession for a portion of 2023. A global recession, defined as a contraction in annual global per capita income, is more rare because China and emerging markets often grow faster than more developed economies. Essentially the world economy is considered to be in recession if economic growth falls behind population growth.
It's a delicate season now, so you can do little or nothing on your own. Hence I’ll suggest you get yourself a financial expert that can provide you with valuable financial information and assistance
Very true! I've been able to scale from $50K to $189k in this red season because my Financial Advisor figured out Defensive strategies which help portfolios be less vulnerable to market downturns
My advisor is ‘’Julia Ann Finnicum’’ she’s highly qualified and experienced in the financial market. She has extensive knowledge of portfolio diversity and is considered an expert in the field. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market
thanks for sharing this, I googled the advisor you mentioned and after going through her resume, I can tell she's a pro. I wrote her and I'm waiting on her reply
LOL THIS IS A FAKE CONVERSATION. This is a scam. One person is posting as multiple people to make you think someone is asking about an "advisor". It's all fake, guys.
Even if you have a short term rental, you have to prove material participation, otherwise, it would still be considered a passive activity. The rules for material participation that you mentioned were for qualifying as a real estate professional. Listed below are the test for material participation. You would need to satisfy 1 of the 7. 1) The individual participates in the activity for more than 500 hours during the year. 2) The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year. 3) The individual participates in the activity for more than 100 hours during the taxable year, and such an individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year. 4) The activity is a significant participation activity for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours. 5) The individual materially participated in the activity for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year 6) The activity is a personal service activity, and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year. 7) Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during such a year. Please don't take advice from the internet and consult your tax advisor.
....and, as a REP, when you sell the asset, it's taxed at the much higher rate of taxes, ordinary income tax, rather than the passive capital gains tax. Something everyone needs to line up with their own financial situation and weigh the benefits vs. long term tax ramifications.
@@idahohousehunter from what I understand the IRS stills calculates the allowed depreciation per year whether you took it or not. Deciding to opt out of writing off depreciation doesn't get you out of the ordinary income taxes you will have to pay when you sell.
@@dracox3108 Yes, but using strategies like cost segregation and bonus depreciation will increase the amount of depreciation that you are "allowed to take" essentially. Using these strategies does dramatically increase the amount of recapture that you have to pay back when you sell the property. Basically, there is no escaping the reality that any depreciation you take, you do have to repay as recapture (except for a couple exceptions such as a 1031 exchange, or holding onto it until your death and passing it on to an heir).
Remember, Depreciation, is not a permanent deduction. You'll have to pay the piper one day when you sell, unless you 1031 it, then you'll have it there when you sell. The only way to make depreciation never payable, is when you die and your heirs get it and under the current guilde lines they inherit it tax free through the STEP UP program.
@@WoodUCreate that’s fine. If you don’t sell it and pass it on it’s a step up in basis as you mentioned the goal should rarely be to sell rentals if they cash flow and are in good areas anyway if you are a buy and hold investor.
James, completely agree. I find most of the people on here with an opinion say what they think “in theory”, without ever having done it. A 1031 is complicated, and I can tell you most people do not sell using a 1031.
protip: you glossed over it, but AGI is a beautiful concept too. It doesn't matter how much you made, if you can create enough deduction to get under the $150K AGI, then those additional deductions start applying to you too. The government sent me stimulus checks because my AGI was below $75,000 or something (didn't ask, didn't have a way to deny, definitely had a use for the money). But just like this video picks apart the definition of "materially participate" there is room to pick about what AGI is.
@@bato-wm5gl Yes. If you make under $100k, you can deduct up to $25,000 of rental losses per year (including losses that came from cost seg). The amount you can deduct phases out if your income is between $100k-$150k (so for example, at $125k of income you can deduct $12,5000/year). I do think that so many of these videos don't mention that because their income is above the limits for that exception, but it's a great deduction for a lot of people. I'm a tax advisor specializing in taxes for real estate investors (located in Austin TX).
I am trying to do this now, it is amazing how many CPA's do not know about this and are fixated on your method without the loophole or know nothing about it. I am actually teaching CPA's when I talk to them and I am nothing close to a CPA or tax professional. I just watched KD. Wish your firm KD was more affordable for those just starting off though. Would love to use this guys firm but they want at least $10k.
Exact video/training I was looking for, for a long time. I learned more in this one video than all the videos I watched in the last 6 months. Thank You
in order to have -200k loss from income - exp - depreciation, you need $5.5mill property value, with 0 cash flow monthly. $5.5m/27.5 = 200k. Note $5.5m can't include land since land does not depreciate
You are correct in stating short term rentals aren’t classified as rentals by the IRS, however, they are still a business and the owner needs to show material participation to leverage losses. Please read the Passive Activity Loss (ATG) again. This is clearly stated in chapter 2 page 3.
your a Patriot bro...glad to have a soldier like you . you live not only to had value to your life , but demonstrate the true servitude.... adding value to life of your fellow neighbors... PATRIOT!!
I am very much "getting" this and am super stoked that I stumbled on your mistakes with LLC's video with impeccable timing. Thanks for making this all available!❤
My mouth is on the floor. I just rented my unit as a long-term rental, and now I regret it. I thought I'd meet the requirement because I am self-managing (I live next door). I'm happy I found you, I'm crying that I didn't find you earlier.
You have a gift for teaching. I’ve watched many other videos but you know how to connect everything in a way its much simpler to understand. Glad i found you. Thanks
I tried to go on your website to schedule a 30 minute free consult, but when it came to taking a timeslot, there is nothing available. I would prefer not to submit all my sensitive information when there is no appointment that I can make with your tax professionals. Great RUclips video by the way.
You are literally blow mine mind right now Karlton. I have been thinking about opening a business, now I have a clearer view on what to do thanks to you...
It seems like the average stay required to qualify can be increased to 30 days by providing "significant personal services." ( IRS Publication 925 (2022), Passive Activity and At-Risk Rules). Based on the description it sounds like at-request house keeping would qualify.
This was everything. I even laughed out loud a few times when you dropped major gems. I am soo thankful for this. I feel like I'm understanding a foreign language. Great job!
Omg! Where have you been my entire life? I just saw this video and looking forward to seeing the rest, I'm already loving you. Great, awesome content!!!
What was not discussed or mentioned is if an individual has say 4 rental (long term) properties and 1 airbnb (short term) does that 1 short term now include the long term passive income offsets against non-passive income? That wasn't mentioned.
You are the best! I love how you explain things. I just discovered your channel about a week ago and I’ve been binging on your videos. I love this one, especially. But I love them all actually. ❤❤❤❤❤❤❤❤❤
Clearly, everyone's tax situation is unique and different. Isn't it true that once you become an REP (real estate professional), once you go to sell that asset (rental property), the gain is now taxed as ordinary income VS the much lower rate of capital gains? Serious consideration to weigh. Keep up the excellent videos! 🙂
Capital gains when you sell a rental property are still taxed at the (lower) capital gains tax rate when you sell a property, regardless of whether you qualify as a real estate professional. I'm trying to think of what you might be thinking of, and it might be that your gains when selling a property can be taxed as ordinary income if you are in the business of flipping houses. In that case it would be considered ordinary income, and not capital gains. (I'm a Austin, TX based tax advisor specializing in taxes for real estate investors.)
This is really good! I need to go back and look at mine again because i actively manage my property but they said i still made too much money to deduct my passive losses from my income.
I’ve interviewed a few cpas and they all say losses are capped at 150k AGI and have to be a REP to get pass thru losses on all types of investment properties including STR
Why does anyone need an engineer and tax professional to segregate out any home appliance, carpet when IRS pub 946 specifically says appliances, carpet have a 5 yr life. Can't any owner can take pictures, write down each item, fill out forms and provide that to a CPA?
Depreciation is not some sort of fake "paper loss" though (unless you fake it, that is). It's actual spending you have done for things you don't get to enjoy. In other words, you may not be paying some taxes, but you're spending that money on your customers anyway. Hardly a reason to get into a RE business (which will also require significant investment, both financial and of your time), which is how you're framing this whole thing.
EXCELLENCE!! So, thankful my Brother enlightened me on all of this awhile back. QUESTION~ If you rent a below market value unit AND your other income is strictly SSI - do you even have to file returns? Not sure I want to know answer, lol!
Does anyone know if the 150k passive loss rules exception doubles for married couples to 300K? If it doesn't, getting married to someone that brings your combined AGI over 150k could really hurt.
Everything you mentioned is correct, how ever you need to be really careful. Depreciation does help considerably to reduce taxable income or even to claim a lost, how ever it also reduces your baisis meaning, you might have to give it back when selling the real estate.
This was a terrific video to bring together so many pieces! I used to send clients 5 different RUclips videos to explain what you have in this one clip. Thank you.
What a great primer on this subject and really helps me a lot as a real estate professional and somebody that has an Airbnb. It seems that I qualify two different ways to move this passive losses over to my active income. Thank you so much for your detailed analysis of this and helping me to be more crystal clear on it. I always wondered how that was done!
Keep in mind that whether you're a real estate professional or it's a short term rental, to qualify for the passive loss rules tax benefits you still have to materially participate. That means if you just have a property manager managing it, you probably won't qualify. Just a heads up on that.
Hi Karlton. 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!
we bought a new House me and my husband and our previous house was being rented as of this moment. this is really good information, i want to know more cause this is the first time we are filling with 2 houses in our taxes.
Just stumbled upon your video and you explained everything in such detail and simplified for even me (not a math whiz or investment whiz)! Thank you! Thank you! Thank you! I liked and will be following you to learn more! Sharing with my teens so they can have a head start and do more with their money than I ever did! GOD bless you mightily! ❤❤❤❤
Great video. One question though, my understanding is that once once you do a cost segregation to depreciate the asset over a short period of time, you can no longer use that segregated portion of the asset for a 1031 exchange! How do you get around that Karlton?
very nice. The short term rental piece is the piece I was missing. Presumably, a 'short term rental' is not classed as a residential property therefore 39yrs depreciation?
Government says things like computers and cameras last longer than one year however the manufacturers warranty only lasts one year... With planned obsolescence in mind I think the reality is quite different than the governments expectation
Karlton - awesome info! 1. If my AGI is under $150k am I able to use passive losses against my ordinary income w/out being a REP? 2. I am working almost every night on our rental property, drywall, paint etc. Would I qualify as a REP if I am doing all the repairs on my rental property?
@@mtigress4589 i make about 95k a year gross. Can i make a cost segregation study on my property and use the results to reduce my w2 since I'm making under 150k a year?
Great content. I am not able to use this YET. However, once I build my infrastructure I will definitely be looking into this strategy. Thanks for sharing your studies.
So I have to either own a separate commercial property , or lease (sub lease), or could I do advanced renting in my own home to family or friends for profit in short term contracts or ?
This guy is just too smart. One of the sharpest people that I have ever come across. Keep it up man! I have subscribed already. I will share the news to others. 🙏🏽👍🏼✊🏽
@@andychang7137 My thinking too. If you renting out a second home as I plan to for retirement income I'll still have to pay the 15% tax after deduction on rent received, unless i'm mistaken
@@bertpainter8385 what 15% tax? if youre referring to the FICA taxes (social security & medicare), that doesnt apply to rental income, only self-employment income
@@mike20855 I'm referring to the Federal tax bracket I end up being in after my SS income. Not the 15.3 for SS & medicare tax you would pay. I'll be around the 15% bracket on average after I claim Social security income during retirement. With just SS I wouldn't pay any taxes. With the additional rental income I'll be adding roughly another 20,000 after average right offs if I LLC. It isn't much unless your on a tight budget which I'll most likely be on or I wouldn't need to rent out my existing home to survive. Fortunately I do have decent savings and equity in my home to help if need be. I was not in a position to invest in my younger days. Now I don't like the risks for my age to chance investing in what I've saved. I know construction well to repair and build, but I also know you can't predict only guess.
@@bertpainter8385 is this a home that was not previously a rental property? if so, you can take depreciation which should generate losses or at least eliminate your rental income. also do you mean the 12% bracket? i dont see a 15% bracket for federal tax
Very informational video, can't thank u enough for sharing the info. The way you explained it made it so much easier to understand all jargon. keep it up.
Good tips. Only problem is that these cost seg benefits are mostly one time use and hard to re-up as most people don’t have another $100-200K for a down payment or financing capacity as a seasoned professional, per bank not IRS standards, to buy more rentals every year.
Can you determine how much to offset each year or control that amount once you start, if you want to offset more one year v the next assuming you have enough losses to cover?
I think learning about taxes is so interesting especially with what you can do with that information. The question that remains is if tax professionals make "bookoo" or not
![How to Use Rental Losses to OFFSET W2 Taxes! [Part 1]](http://i.ytimg.com/vi/1a38vrvO-ko/mqdefault.jpg)
I appreciate the existence of tax breaks but navigating loopholes feels dangerous. How can I ensure I'm taking advantage of tax-advantaged investment structures without potentially encountering unintended consequences?
Loopholes can be tricky, but there are plenty of proven tax-advantaged structures. IRAs and employer-sponsored retirement accounts are great options. You can also explore tax-efficient investment vehicles like municipal bonds or index funds. These offer benefits like tax-deferred growth or tax-exempt interest. Talk to your financial planner about these options.
Yeah, planners could make a lot of difference, particularly in a market such as this. Bonds are pretty unstable at the moment, but if you do the right math, you should be just fine. Bloomberg and other finance media have been recording cases of folks gaining over 250k just in a matter of weeks/couple months, so I think there are a lot of wealth transfer in this downtime if you know where to look. I have been using an FA since 2020, and I return at least $30k ROI, and this does not include capital gain.
Could you kindly elaborate on the advisor's background and qualifications?
I work with Sonya Lee Mitchell as my fiduciary advisor. Simply look up the name. You would discover the information you needed to schedule an appointment.
I searched her up, and I have sent her an email. I hope she gets back to me soon. Thank you
I am 46 and working for 22 years now. This is by far the most useful video for tax saving on RUclips, period.
I’ve done research over the past year so I already knew this but the way you explained it made it so much easier and would have saved me countless hours if I saw this first. Keep crushing it brother!
The “excess business loss” rules in IRC 461(l) were amended by the CARES Act in 2020. These rules prevent you from using business losses from pass through entities (partnerships, s-corps, LLC’s, sole proprietors. Etc.) to offset W-2 income. It does not matter how active you are. If you exceed the income threshold you cannot offset W-2 income with business losses.
Real estate professional status does help here
@@zakshuman8450 IRC 461(l)(6) says that the excess business loss rules shall be applied after the limitations of IRC 469. IRC 469 is where the passive loss rules are codified and includes the “real estate professional rules”. The excess business loss rules are generally agnostic to the income type. The only exclusion to the excess business loss rules I know of is certain farming income/losses for certain years. For a single taxpayer the most business losses you can uses in a year is $250k (plus a little for inflation). So if you have a 500k W-2 and a real estate or other business loss of 500k, you would still owe tax on 250k. This is the w-2 income minus the maximum business loss (250k for single for 500k for married filing jointly). Any excess loss is carried forward as a net operating loss which has other limitations in subsequent years.
@@paulmorrow8372 but this only applies to those owing over $250k on W2 taxes correct? If so everyone under that threshold should still be able to do what the guy in the video is explaining.
WELL ACTUALLY ERASING 250K OF YOUR W2 INCOME NOT 250K OF TAXES, ALL DUE TO THE BUSINESS LOSSES GAME. BUT WHAT THIS GUY IN THE COMMENTS IS SAYING REALLY HAS NO REAL RELEVANCE WITH 99% OF THE POPULATION. THIS 250K LIMIT I’VE NEVER EVEN HEARD OF IN MY 7YRS OF DOING THIS, SO I HAVE TO LOOK INTO THAT TO SEE IF ITS BOGUS OR NOT. NOW EVEN IF IT WERE TO BE TRUE THAT YOU COULD ONLY WRITE-OFF $250K OF W2 INCOME FROM BUSINESS LOSES, THAT’S NOT INCLUDING THE OTHER WRITE-OFF’S THAT’S NON BUSINESS RELATED. YOU CAN VERY WELL WRITE-OFF ANOTHER $100K IN NON-BUSINESS REALTED WRITE-OFF.’S AGAINST YOUR W2 INCOME. AND WIPE OUT $350K OF W2 INCOME. THEN YOU COULD START AGAIN WITH YET A 2ND SEPERATE BUSINESS WITH WRITE-OFF’S. AND ON AND ON AND ON…. THE THING IS YOUR ALSO NOT PAYING ANY TAXES ON THE BUSINESS INCOME IN ADDITION TO THE W2 INCOME. AND EVEN IF YOU DO WIND UP PAYING ANY TAXES ON THE W2 INCOME, THE OVERALL TAX SAVINGS WOULD BE ASTRONOMICAL IN COMPARISON TO THE NONSENSE TAX THAT YOU’D PAY.
Can we schedule a 1x1 meeting ?
I spent 10 years in the consulting practice of a large accounting firm. I am not saying this video is wrong, but one BIG thing this video does not mention is that the depreciation taken lowers your basis in the asset. When you sell the asset you now have a higher gain and pay more taxes. There is something called 1250 recapture which taxes that portion of the sale at higher rates than normal capital gains. You CAN benefit from the rate arbitrage between ordinary losses and 1250 gains, but because depreciation was taken more gain will be recognized later and at a higher rate.
Agreed but that's when you need to get into 1031's, stepped up basis, Deferred Sales Trusts, Delaware Statutory Trusts, Spendthrift Trusts etc
@@samuelhartzog7209 and then you might avoid taxes, but spend a mountain of money on an army of attorneys and title companies to draft and perform all of this. And 1031 doesn’t eliminate anything, just kicks the can a little farther down the road.
@@samuelhartzog7209can I hire u
I am only 17 and turn 18 in a few weeks. Have learned so much from you and can't wait to start using all the information you have taught me. In the future I plan on being one of your clients.
Good luck youngster. I wish you much success in life with your rentals and your businesses.
Buy a duplex, triplex, etc as your first home. House hack. Live in one side and rent out others. This will allow you to save money for another property. Rinse repeat. Wish I did it long time ago.
@@KayakDIY bad advice. Duplex comes with a lot of headache with maintenance and tenants especially if they don’t like each others.
Single homes in good neighborhoods is the best. Don’t ever invest in the hood. You can also buy distressed homes and fix them ( but if you don’t know what you are doing contractors might still money from you). I now buy ready to use and do minor works.
Learn the tax systems and not just be a client let him teach what you’re not gonna ever have a chance to learn in school.
@@Anonyme67 wrong
There's limitations to all of this tho. Your tenants have to be less than 7 days on average (essentially must be airbnb or the like). I'd also assume that you can only depreciate an item in your home once. Meaning if you depreciate over a short number of years, after those years have passed, you can no longer claim a loss every year. How many airbnb rental properties truly have 200k per year of itemized depreciation as in the example? This video is a good concept but only applies to a small subset of people and most likely does not generate as large of a tax write off as the example implies
This guy is full of bad advice.
It's not bad advice but the original comment is correct.. this will work in year 1. Once you've done the cost seg you need a new property to do it again. Also, the STR is work. And much riskier than owning a straight up rental which would be considered passive.
such a legend. man the tax code was invented for us to utilize not fear. thank you for doing your research and delivering to us. the value you bring with every video is enormous. Thank you Karlton
I have a very experienced CPA, have for years. I showed her this video. And she smiled. The only question that came out of her mouth was, a $200,000 loss? When would that happen? you’re certainly not going to consecutively have a loss on a house of $200,000 every year. So is the game to stay under that seven days occupancy and make the house a failure?. I don’t think you define clear enough if the rental property should be successful, or it should be a complete failure for the tax write off. Because if you’re running a normal even mediocre short-term rental you’re not going to have a $200,000 loss. So is the goal to buy a property not to make money and only to use for a tax write off?
I think it’s important you tell people this isn’t a situation for everyone. I know you have another videos but in this video and others I would make sure people understand that you just don’t go out and buy a property and automatically get a right off. It isn’t that easy. You have to work at that house to be a failure if that is what you’re trying to accomplish. And then the question becomes what am I really saving if the house is a failure? like the concept understand the legality‘s and the tax, but I’m completely missing the real world example here.
Karlton is introducing the concept while promoting his business. My take-away is that loss from short term rental is not passive loss and that can offset our W-2 income. $200K loss from STR is ... misleading, even if cost seg. is applied. Thanks for sharing your thoughts. Karlton did a good job overall.
I have never wanted to yell at a RUclipsr this much while watching. He is nothing but a snake oil salesman. As if our goal is to lose money. We are not investing to lose money, we are investing to make money. Also, I can’t believe he said W-2 employees work 8 thousand hours per year.
I’ve listened to a lot of financial advice on RUclips. This is the best. No BS, no repackaging obvious facts as insightful. This is just great stuff and 100% useful and not obvious.
You are the ONLY one who makes this look like fun. In the middle of filing taxes right now and I feel like I got some really valuable information from this video. Thank you so much. ☀️
Karlton I’m a cost segregation study provider and this is the best video I’ve seen that accurately defines cost seg while also showing the tax benefits to be found in real estate.
Hey quick question should the realestate be acquitted under personal or would it be best to acquire them under your llc
@@ericboco3029 This type of LLC is a disregarded entity when it comes to taxes, so it doesn't make any difference in terms of tax strategies. So the decision about whether to hold your properties in an LLC would be based on whether you might get at least some partial liability protection from having it in an LLC. (I'm a tax professional, but not a lawyer.)
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It's a delicate season now, so you can do little or nothing on your own. Hence I’ll suggest you get yourself a financial expert that can provide you with valuable financial information and assistance
Very true! I've been able to scale from $50K to $189k in this red season because my Financial Advisor figured out Defensive strategies which help portfolios be less vulnerable to market downturns
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LOL THIS IS A FAKE CONVERSATION. This is a scam. One person is posting as multiple people to make you think someone is asking about an "advisor". It's all fake, guys.
This is phenomenal!
Karlton you mentioned about the $600K property you bought generated a $200K paper loss can you explain how that $200K became paper loss?
Great question. I thought more people would ask about this.
Very well done, Karlton. You take boring (but important) topic and make it fun to watch. BRAVO.
agree
Even if you have a short term rental, you have to prove material participation, otherwise, it would still be considered a passive activity. The rules for material participation that you mentioned were for qualifying as a real estate professional.
Listed below are the test for material participation. You would need to satisfy 1 of the 7.
1) The individual participates in the activity for more than 500 hours during the year.
2) The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year.
3) The individual participates in the activity for more than 100 hours during the taxable year, and such an individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year.
4) The activity is a significant participation activity for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours.
5) The individual materially participated in the activity for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year
6) The activity is a personal service activity, and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year.
7) Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during such a year.
Please don't take advice from the internet and consult your tax advisor.
....and, as a REP, when you sell the asset, it's taxed at the much higher rate of taxes, ordinary income tax, rather than the passive capital gains tax. Something everyone needs to line up with their own financial situation and weigh the benefits vs. long term tax ramifications.
@@idahohousehunter from what I understand the IRS stills calculates the allowed depreciation per year whether you took it or not. Deciding to opt out of writing off depreciation doesn't get you out of the ordinary income taxes you will have to pay when you sell.
@@dracox3108 Yes, but using strategies like cost segregation and bonus depreciation will increase the amount of depreciation that you are "allowed to take" essentially. Using these strategies does dramatically increase the amount of recapture that you have to pay back when you sell the property. Basically, there is no escaping the reality that any depreciation you take, you do have to repay as recapture (except for a couple exceptions such as a 1031 exchange, or holding onto it until your death and passing it on to an heir).
@@idahohousehunterthere is another whole aspect to this video, which will then follow up with a 1031, to avoid recapture tax.
Remember, Depreciation, is not a permanent deduction. You'll have to pay the piper one day when you sell, unless you 1031 it, then you'll have it there when you sell. The only way to make depreciation never payable, is when you die and your heirs get it and under the current guilde lines they inherit it tax free through the STEP UP program.
That’s why most smart people don’t sell their real estate unless they 1031 exchange.
@@mra.4466 still doesn’t get rid of the depreciation, just transfers to the new property.
@@WoodUCreate that’s fine. If you don’t sell it and pass it on it’s a step up in basis as you mentioned the goal should rarely be to sell rentals if they cash flow and are in good areas anyway if you are a buy and hold investor.
James, completely agree. I find most of the people on here with an opinion say what they think “in theory”, without ever having done it. A 1031 is complicated, and I can tell you most people do not sell using a 1031.
Please go into more detail on the 200k in losses. That doesn't seem possible yearly
i have the same thought, how does the 200k coming from ?
I love how hyped Karlton gets about his own knowledge 👏 awesome!
protip: you glossed over it, but AGI is a beautiful concept too. It doesn't matter how much you made, if you can create enough deduction to get under the $150K AGI, then those additional deductions start applying to you too. The government sent me stimulus checks because my AGI was below $75,000 or something (didn't ask, didn't have a way to deny, definitely had a use for the money). But just like this video picks apart the definition of "materially participate" there is room to pick about what AGI is.
I am just starting my financial literacy, and I would love any insights you might be able to offer. What city are you located in?
If i make under 150k AGI can i deduct my estimatrf property cost segregation study without having to do short term rentals?
@@bato-wm5gl Yes. If you make under $100k, you can deduct up to $25,000 of rental losses per year (including losses that came from cost seg). The amount you can deduct phases out if your income is between $100k-$150k (so for example, at $125k of income you can deduct $12,5000/year). I do think that so many of these videos don't mention that because their income is above the limits for that exception, but it's a great deduction for a lot of people. I'm a tax advisor specializing in taxes for real estate investors (located in Austin TX).
I am trying to do this now, it is amazing how many CPA's do not know about this and are fixated on your method without the loophole or know nothing about it. I am actually teaching CPA's when I talk to them and I am nothing close to a CPA or tax professional. I just watched KD. Wish your firm KD was more affordable for those just starting off though. Would love to use this guys firm but they want at least $10k.
Excellent explanation! Being a physician with minimal Tax knowledge, this was very easy to understand !
Karlton, this video was amazing. This is exactly the kind of information I have been looking for. Everyone needs to listening to this.
New to real estate investing and I can't get enough of this guy. Keeps it simple and explains things well. Awesome service you are doing!
Exact video/training I was looking for, for a long time. I learned more in this one video than all the videos I watched in the last 6 months. Thank You
Need this man to do my taxes.
in order to have -200k loss from income - exp - depreciation, you need $5.5mill property value, with 0 cash flow monthly. $5.5m/27.5 = 200k. Note $5.5m can't include land since land does not depreciate
Thank you. Can’t wait to have some one time with your team.
You are correct in stating short term rentals aren’t classified as rentals by the IRS, however, they are still a business and the owner needs to show material participation to leverage losses.
Please read the Passive Activity Loss (ATG) again. This is clearly stated in chapter 2 page 3.
Thanks, patting myself on the back and thanking God for stumbling across your channel. Great stuff!!!
your a Patriot bro...glad to have a soldier like you . you live not only to had value to your life , but demonstrate the true servitude.... adding value to life of your fellow neighbors... PATRIOT!!
That was a fantastic video! You broke it all down in a way that was super easy to follow, thank you!
I feel so blessed finding this page. The universe is responding.
I am very much "getting" this and am super stoked that I stumbled on your mistakes with LLC's video with impeccable timing. Thanks for making this all available!❤
My mouth is on the floor. I just rented my unit as a long-term rental, and now I regret it. I thought I'd meet the requirement because I am self-managing (I live next door). I'm happy I found you, I'm crying that I didn't find you earlier.
You have a gift for teaching. I’ve watched many other videos but you know how to connect everything in a way its much simpler to understand. Glad i found you. Thanks
Thanks for your comment ⬆️ Reach out to me for consultation and more tips on how to build your finances ✉️,
I tried to go on your website to schedule a 30 minute free consult, but when it came to taking a timeslot, there is nothing available. I would prefer not to submit all my sensitive information when there is no appointment that I can make with your tax professionals. Great RUclips video by the way.
Full time W2 worker doesn’t work over 8000 hours in a year, by the way!!
How about the unrecaptured depreciation at the time of sale?
Material Participation on short term rentals is almost as hard for most folks to achieve than REP status… harder for some.
Only works if the real estate income is in your social security number. If real estate is in LLC, taxes filed separately
this man has saved so many people so much money holy shit
You are literally blow mine mind right now Karlton. I have been thinking about opening a business, now I have a clearer view on what to do thanks to you...
It seems like the average stay required to qualify can be increased to 30 days by providing "significant personal services." ( IRS Publication 925 (2022), Passive Activity and At-Risk Rules). Based on the description it sounds like at-request house keeping would qualify.
Glad to see someone went to the tax code! Let me know if I can be of any help brother 💪🏾
This was everything. I even laughed out loud a few times when you dropped major gems. I am soo thankful for this. I feel like I'm understanding a foreign language. Great job!
Omg! Where have you been my entire life? I just saw this video and looking forward to seeing the rest, I'm already loving you. Great, awesome content!!!
Thank you! I look forward to seeing you on the challenge www.thetaxfreewealthchallenge.com
Can add all that to the residential property basis, so when you sell, your sales price and gain offset by higher basis.
What was not discussed or mentioned is if an individual has say 4 rental (long term) properties and 1 airbnb (short term) does that 1 short term now include the long term passive income offsets against non-passive income? That wasn't mentioned.
My uncle greatly contributed to congress implementing law preventing passive losses against earned incime
You are the best! I love how you explain things. I just discovered your channel about a week ago and I’ve been binging on your videos. I love this one, especially. But I love them all actually. ❤❤❤❤❤❤❤❤❤
Clearly, everyone's tax situation is unique and different. Isn't it true that once you become an REP (real estate professional), once you go to sell that asset (rental property), the gain is now taxed as ordinary income VS the much lower rate of capital gains? Serious consideration to weigh. Keep up the excellent videos! 🙂
Capital gains when you sell a rental property are still taxed at the (lower) capital gains tax rate when you sell a property, regardless of whether you qualify as a real estate professional. I'm trying to think of what you might be thinking of, and it might be that your gains when selling a property can be taxed as ordinary income if you are in the business of flipping houses. In that case it would be considered ordinary income, and not capital gains. (I'm a Austin, TX based tax advisor specializing in taxes for real estate investors.)
Karlton, great content! Keep them coming Sir...
The only video on you tube that breaks this down so plainly and decisively. Thank you!!
One of the most important videos I watched about how to leverage RE tax benefits... Thank you so much for putting this together. Super helpful!
Glad you enjoyed it!
This is really good! I need to go back and look at mine again because i actively manage my property but they said i still made too much money to deduct my passive losses from my income.
I’ve interviewed a few cpas and they all say losses are capped at 150k AGI and have to be a REP to get pass thru losses on all types of investment properties including STR
Karlton is a geat teacher, explained this very well.
GOAT ... that's all. I've been learning taxes for a little while but this my friend?! Finding your channel I've struck GOLD! GOLD YOU HEAR ME??
DEPRECIATION RECAPTURE! Please look up section 1250 recapture rules and also case studies on a "real estate professional"
Why does anyone need an engineer and tax professional to segregate out any home appliance, carpet when IRS pub 946 specifically says appliances, carpet have a 5 yr life. Can't any owner can take pictures, write down each item, fill out forms and provide that to a CPA?
Karlton you’re the absolute GOAT for anything taxes 🙌🏼
Appreciate it!
You are God sent. Thank you for allowing Gos to use you for those of us who need your expertise🙌🏽🙌🏽
Depreciation is not some sort of fake "paper loss" though (unless you fake it, that is). It's actual spending you have done for things you don't get to enjoy. In other words, you may not be paying some taxes, but you're spending that money on your customers anyway. Hardly a reason to get into a RE business (which will also require significant investment, both financial and of your time), which is how you're framing this whole thing.
EXCELLENCE!! So, thankful my Brother enlightened me on all of this awhile back. QUESTION~ If you rent a below market value unit AND your other income is strictly SSI - do you even have to file returns? Not sure I want to know answer, lol!
America is a beautiful place!! Taking notes!! Thank you sir!! 🙏🏽
Does anyone know if the 150k passive loss rules exception doubles for married couples to 300K? If it doesn't, getting married to someone that brings your combined AGI over 150k could really hurt.
Everything you mentioned is correct, how ever you need to be really careful. Depreciation does help considerably to reduce taxable income or even to claim a lost, how ever it also reduces your baisis meaning, you might have to give it back when selling the real estate.
Unless you do a 1031 exchange and buy another property
This was a terrific video to bring together so many pieces! I used to send clients 5 different RUclips videos to explain what you have in this one clip. Thank you.
Well my day just got better. I just bought a short term rental and I paid way to much in taxes last year.
It’s 3am and I’ve binge watch 3 straight hours of your content. You have saved me $150k. I owe you brotha. Thank you.
Really great explanation. I had read bits here and there but this is a really great primer to give people the base understanding of these concepts
What a great primer on this subject and really helps me a lot as a real estate professional and somebody that has an Airbnb. It seems that I qualify two different ways to move this passive losses over to my active income. Thank you so much for your detailed analysis of this and helping me to be more crystal clear on it. I always wondered how that was done!
Keep in mind that whether you're a real estate professional or it's a short term rental, to qualify for the passive loss rules tax benefits you still have to materially participate. That means if you just have a property manager managing it, you probably won't qualify. Just a heads up on that.
Hi Karlton. 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!
Great content, I just have 1 nit-pick. 40 hours a week, assuming no vacation, is 2,080hrs/year, not 8k.
This is gold.
we bought a new House me and my husband and our previous house was being rented as of this moment. this is really good information, i want to know more cause this is the first time we are filling with 2 houses in our taxes.
Just stumbled upon your video and you explained everything in such detail and simplified for even me (not a math whiz or investment whiz)! Thank you! Thank you! Thank you! I liked and will be following you to learn more! Sharing with my teens so they can have a head start and do more with their money than I ever did! GOD bless you mightily! ❤❤❤❤
Great video. One question though, my understanding is that once once you do a cost segregation to depreciate the asset over a short period of time, you can no longer use that segregated portion of the asset for a 1031 exchange! How do you get around that Karlton?
I am on the edge of my seat watching this. Better than NetFlix! I’m also watching at 2X speed. That might have something to do with the excitement😂
very nice. The short term rental piece is the piece I was missing. Presumably, a 'short term rental' is not classed as a residential property therefore 39yrs depreciation?
Government says things like computers and cameras last longer than one year however the manufacturers warranty only lasts one year... With planned obsolescence in mind I think the reality is quite different than the governments expectation
Hey Karlton, I’m patting myself on the back with a smile. 😁 thank you! 💪🏽
Karlton - awesome info! 1. If my AGI is under $150k am I able to use passive losses against my ordinary income w/out being a REP? 2. I am working almost every night on our rental property, drywall, paint etc. Would I qualify as a REP if I am doing all the repairs on my rental property?
Sounds like you would, at least for that year.
If you are actively participating like that but dont qualify for REP you may claim up to 25k loss each year. It's phased out from 100k to 150k AGI
@@mtigress4589 i make about 95k a year gross. Can i make a cost segregation study on my property and use the results to reduce my w2 since I'm making under 150k a year?
@@bato-wm5gl def talk to your accountant about it
Feeling so lucky to have found your Channel. Thank you
@17:20 40x52 = 2080. 2080 is less than, not greater than 8000 hours.
Great content. I am not able to use this YET. However, once I build my infrastructure I will definitely be looking into this strategy. Thanks for sharing your studies.
I loved the way you presented this information - the graphics and visuals really helped me understand the topic better.
So I have to either own a separate commercial property , or lease (sub lease),
or could I do advanced renting in my own home to family or friends for profit in short term contracts or ?
This guy is just too smart. One of the sharpest people that I have ever come across. Keep it up man!
I have subscribed already. I will share the news to others.
🙏🏽👍🏼✊🏽
Great content for those of us who have rental assets and are still working our day jobs. I think this is where most of us start
But usually rental is long term unless it’s like Airbnb type of house
@@andychang7137 My thinking too. If you renting out a second home as I plan to for retirement income I'll still have to pay the 15% tax after deduction on rent received, unless i'm mistaken
@@bertpainter8385 what 15% tax? if youre referring to the FICA taxes (social security & medicare), that doesnt apply to rental income, only self-employment income
@@mike20855 I'm referring to the Federal tax bracket I end up being in after my SS income. Not the 15.3 for SS & medicare tax you would pay. I'll be around the 15% bracket on average after I claim Social security income during retirement. With just SS I wouldn't pay any taxes. With the additional rental income I'll be adding roughly another 20,000 after average right offs if I LLC. It isn't much unless your on a tight budget which I'll most likely be on or I wouldn't need to rent out my existing home to survive. Fortunately I do have decent savings and equity in my home to help if need be. I was not in a position to invest in my younger days. Now I don't like the risks for my age to chance investing in what I've saved. I know construction well to repair and build, but I also know you can't predict only guess.
@@bertpainter8385 is this a home that was not previously a rental property? if so, you can take depreciation which should generate losses or at least eliminate your rental income. also do you mean the 12% bracket? i dont see a 15% bracket for federal tax
Great video. Super informative - even as a former tax preparer. But just fyi, 40 hours/week = 1 FTE = 2,080 hours/year - not 8,000 hours/year.
Wow. You put it all together so beautifully! You are great!
This was very informative Karlton. You earned a subscriber!
Very informational video, can't thank u enough for sharing the info. The way you explained it made it so much easier to understand all jargon. keep it up.
This is pure gold in video form thank you 🙏
Glad it was helpful!I will be discussing more advanced tax strategies during the Tax Free Wealth Challenge! www.thetaxfreewealthchallenge.com
Good tips. Only problem is that these cost seg benefits are mostly one time use and hard to re-up as most people don’t have another $100-200K for a down payment or financing capacity as a seasoned professional, per bank not IRS standards, to buy more rentals every year.
The losses carry over to the next year
Can you determine how much to offset each year or control that amount once you start, if you want to offset more one year v the next assuming you have enough losses to cover?
Nice video. You mentioned that working 40hrs a week is over 8000hr a year. It's actually (40*52=2080) timestamp 17:23
Same here. Already knew about this for the past 10 months. Your video made it very clear and easy to understand. Great video. I must take action.
I think learning about taxes is so interesting especially with what you can do with that information. The question that remains is if tax professionals make "bookoo" or not
Only a few people take time to study this. So yes the rest of millions of people. Allows tax professionals to make bookoos.