Sample Strategy:
Tax Burden Reduction

Depreciation is a significant tax advantage available to real estate investors.

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Every real estate owner can expense depreciation to lower their taxable income, but a savvy investor can use depreciation methods strategically to massively impact their tax bill. Here is a hypothetical example of an investor who purchases real estate to shield her other income. Click here for more on depreciation. Talk to your CPA about how you might lower your own tax burden.

Suppose a doctor is a limited partner in a physician group, and she receives a K-1 each year showing an income of $200,000 from the partnership. This passive income, along with her wages - active income - puts her in the 37% tax bracket.

 

Just the income from her interest in the partnership will leave her with a tax bill of $74,000. 

She decides that she would like to protect her passive income from taxes and add an income stream to her wealth-building. This savvy doctor decides to purchase a 4-plex for $600,000 by paying $150,000 cash. Her tax cash flow after deductible expenses for the first year is $15,000.

This physician has a great CPA who suggests that she take Bonus Depreciation that allows her to write off 25% of the value of the property - $150,000 in the first year.

Total Passive Income:      $200k + $15k = $215k

Less Depreciation Expense:                     -$150k

Taxable Passive Income:                              $65k

New Tax Bill                                                  $24k

Tax Savings                                      $50k!

By acquiring a cash flowing investment property, the doctor slashes her tax bill, leaving more money for her to invest now! Her tax savings alone returned her one-third of her cash investment back in the first year. She has not only reduced her tax burden, but she has also created a powerful wealth-building stream in real estate.

This is a hypothetical situation and should not be taken as accounting advice. Please consult a Certified Public Accountant.

Passive Income

Depreciation Expense

Taxable Passive Income