Discover how to reduce your taxes with commercial real estate. In this video, you'll learn how to take advantage of the same tax saving tools multi-millionaires use to create incredible wealth.
3 Stages to Reducing Taxes with Commercial Real Estate
Stage 1: Starting Point
Stage 1 is a starting point. If you are in stage 1, you have a full-time job but you don't own any real estate investments. You may own your own home but that's about it. If you are in this stage, you pay the most in taxes because you only get a few tax right-offs. Money comes in from your job and Uncle Sam takes it from you. Don't stay here! This teaching is about how to move on from here so the government takes less and you have more money in your pocket. So the smart thing to do is to advance to stage 2 and buy commercial estate. This is how you reduce taxes with commercial real estate...
Stage 2: Buy Commercial Real Estate
At this stage you have a full-time job, and you have purchased your first commercial property, such as a small apartment building. You now qualify for some legal tax loopholes although you are limited. If you make up to a $100,000, you can reduce your tax burden by $25,000. You didn’t have this tax break in stage one because you didn’t own commercial real estate. Now, once you start making $150,000 a year this $25,000 tax deduction starts to phase out, but all is not lost. The smart thing to do is to stay disciplined and buy more commercial real estate. Discipline equals freedom.
Ten, twenty years ago, my friends and family bought bigger homes and more expensive cars while I stayed disciplined and invested in commercial real estate. I still live in the same house, but guess what? I have multiple vacation homes around the U.S. because I was disciplined. They are stuck with just one big home and I can work from six or seven different places. And commercial real estate pays for all of it. None of it comes out of my pocket. You can do the same if you stay disciplined in stage 2 and buy more commercial real estate. Which leads you to the final stage of being a smart commercial real estate taxpayer.
Stage 3: Real Estate Professional Status
Your goal as a commercial real estate investor is to grow your portfolio and become a real estate professional per the IRS rules so you can reduce your taxes. The IRS requires that you:
- Own rental property.
- Fifty percent or more of your time must be spent on real estate activities, meaning that you can't have a full-time job and be a real estate professional.
- You must pass the 750-hours test, which requires you to have 750 work hours dealing with your real estate properties throughout the calendar year.
- You must pass the material participation test. This test requires you to prove you are materially participating in your business of commercial real estate.
Real Estate Professional Status Benefits:
- You get unlimited write-offs. You can write off everything. Up to hundreds, if not millions of dollars every year. If I were just a high paid professional making a million dollars a year, I would have substantial income taxes to pay. As a smart real estate professional, you should be paying very little, if not nothing.
- This is how the big boys play, those people worth hundreds of millions of dollars. This is how they can be so wealthy and yet pay no taxes.
- Either you, as a single person, or your spouse can qualify. So if you are a high earner and you're married, you can keep your job and then your spouse can become the real estate professional.
Tax Benefit Comparison: Real World Example
Commercial real estate investors are taxpayers, we aren’t avoiding taxes. We're just taking advantage of all the legal loopholes to make sure that we don't leave money on the table. Now, I am not a CPA or tax attorney. I hire the best CPAs and tax attorneys to study my properties so I can maximize the tax savings. These studies cost money to do, but they save me hundreds of thousands of dollars each year. Here is a real world examples of how you can reduce taxes using the incredible tax benefits of commercial real estate.
Stage 1 Investor
Most of our beginner proteges are stage one investors. They have a full-time job and perhaps they own their home. And it is fine to start at this stage, just don't stay there. This example is from one of our students who is in the transportation business.
Income: He has a W2 income and earns $100,000 a year.
- They have a home mortgage, so they can write off $25,000 of that.
- He can write off $5,000 of their IRA contributions.
- They have other expenses they can deduct which equal $7,000.
Taxable Income: That brings their taxable income down to $63,000.
Now, on paper this looks pretty good. They brought their taxable income down from $100,000 to $63,000. However, by moving to stage 2 and purchasing their first commercial property they can reduce their taxable income even further.
Stage 3 Real Estate Professional
Now, as I mentioned above, the goal is to build your commercial real estate portfolio so you can meet all the IRS requirements and become a real estate professional. Our protégé who started out in stage 1 has reached stage 3. Because he makes a decent W2 income, he kept his job, and his wife is the real estate professional.
Total Income: Between his job and their commercial real estate investments, they made $300,000. That’s about $25,000/month.
Deductions: Now that his wife is a real estate professional, they have a lot more deductions.
- They can write off $25,000 of their mortgage
- They continue to contribute to their IRA, so they have that $5,000 deduction.
- Because they have commercial real estate, they can deduct $75,000 of their mortgage interest payments.
- They can use depreciation as a tax tool and write off $75,000 in depreciation of their properties.
- As a real estate professional, they have $70,000 in additional write-offs. These include a home office, their car, eyeglasses, trips to their property, they can write off all of it now. Even though the husband works in a transportation business, his wife is considered the real estate professional, so combined they get all the write-offs.
- Additional $100,000 deduction from cost segregation study on one of their apartments.
Taxable Income: Their deductions add up to $350,000, which gives them a loss of $50,000 on paper. That is not negative cashflow, that is a paper loss. They pocketed $300,000, but it shows a -$50,000 on the tax returns. How did they do that? By becoming a real estate professional. So this year they pay zero in taxes. And they can apply that -$50,000 into the next year, and they will cost seg another property and get another $100,000 deduction. Which means hopefully they won’t be required to pay taxes next year either.
2 Powerful Tax Saving Tools
Depreciation: The IRS allows you to depreciate your building, not the land and that depreciation is spread over twenty-seven and a half years. Our student purchased a million-dollar property. 30% of that property is associated to land, which you can't depreciate, but the $700,000 remaining value of that property can be written off over 27 and a half years. To calculate the amount you can depreciate each year you divide $700,000 by 27 and a half years. That's approximately $25,000 per year for a million-dollar property. Because they were disciplined in stage two, they were able to purchase several commercial properties and in the example above they can deduct the depreciation from all their commercial investments.
Cost Segregation: I have a video called Cost Segregation Made Simple that will explain what a cost segregation is and how commercial real estate investors can use it as a powerful tax saving tool. It allows you to accelerate the amount of depreciation you can claim on your taxes in the first few years you own the property. Simply put, it adds up all the parts of the building, from appliances to draperies, and instead of writing them off over 27 and a half years, you can write them off over 5years, or even the first year with bonus depreciation. Bonus depreciation is being slowly faded out so it is something you need to take advantage of now. So watch the video and you'll see how a cost segregation study can save you hundreds of thousands of dollars in taxes.
Become My Next Protege: Are you in stage one, working a W2 job with no commercial investments? Don't stay there! Get help investing in a small property, and work with us to build your portfolio until you become a stage 3 smart commercial estate taxpayer. Learn more about our Protege Program here: https://www.commercialpropertyadvisors.com/protege-program/
Roy Anderson says
I enjoyed the video it was very informative with great information. 👍
I enjoyed the blog… A great overview and I didn’t feel intimidating about the stages. It’s concise, comprehensive so much so that I believe I can do this. Thank you.
Jimmy Chisolm says
Awesome as always.
Very Great info