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How do you maximize your real estate investment returns from a tax perspective? Join today’s episode as Tomas Castelli discusses various tax strategies for passive real estate investors. Passive losses can offset both earned and passive income, while proper depreciation strategies upfront can generate larger tax losses. Listen in as Tomas explains the three main tax buckets, the concept of bonus depreciation, and why Lazy 1031 is the way to go for passive investors.

Tomas Castelli

Tomas Castelli is a CPA and tax strategist at The Real Estate CPA. He helps real estate investors minimize their tax burden and maximize their returns. He has equity positions in several real estate syndications and funds. Tomas is the co-host of the Tax Smart REI podcast and an active member of the Left Field Investors community. With his expertise in tax strategies for passive investors, Tomas advises investors on how to make the most of their investments from a tax perspective.

Here are some power takeaways from today’s conversation:

[00:00] Three tax buckets: earned income, portfolio income, passive income

[06:43] Passive losses can offset earned and passive income

[11:26] Cost segregation studies break property into components with different depreciation schedules

[14:21] Rapidly depreciating assets in the first year through bonus depreciation

[17:44] Depreciation recapture taxes the depreciation amount when you sell the asset

[26:06] How Lazy 1031 exchange uses passive losses from new investments to offset gains from sold investments

[31:00] Claiming rental losses against earned income through a real estate professional status

[41:18] Are travel expenses to conferences and properties deductible for passive investors?

[44:36] Check your capital account and box 2 (passive income/loss) on your K-1 for accuracy

Episode Highlights:

[06:43] The Three Tax Buckets

The three main tax buckets are:

1. Earned income - This includes income from employment like salaries, wages, commissions, bonuses, and self-employment income. Earned income is taxed at higher rates up to 37% for federal income tax. It is difficult to offset or reduce taxes on earned income.

2. Portfolio income - This includes income from investments like interest, dividends, capital gains from stocks, bonds, and mutual funds. Losses from investments in this bucket can only offset gains within the same bucket.

3. Passive income - This includes income from passive activities like real estate rentals and limited partnership investments. Losses from passive activities can offset both passive income and earned income. This provides more flexibility and opportunities to reduce taxes.

[26:06] The Lazy 1031 Exchange 

The "lazy 1031 exchange" is a tax strategy where passive losses from new investments are used to offset capital gains from sold investments, without a formal 1031 exchange. By investing in a new passive opportunity after selling an investment for a gain, depreciation, and losses from the new investment can be used to minimize taxes owed. This provides more flexibility than a formal 1031 exchange and requires a pipeline of passive investments generating losses to offset gains from sold investments.

[34:54] Maximizing Depreciation with Bonus Depreciation

With bonus depreciation, most of the five, seven, and 15-year property is frontloaded in the first year. Without it, assets depreciate over several years which results in lesser benefits if the asset is held for a shorter period like three years.

This show is for entertainment purposes only. Nothing said on the show should be considered financial advice. Before making any decisions, consult a professional. This show is copyrighted by Passive Investing from Left Field and Left Field Investors. Written permissions must be granted before syndication or rebroadcasting.

Resources Mentioned:

Tax Smart REI Podcast

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