4 mins
November 9, 2022

Does Real Estate Investing Lower Your Income Tax?

Does Real Estate Investing Lower Your Income Tax?

Make sure you understand this key distinction before you start investing in real estate.

If you’ve spent any time on LinkedIn, you’ve probably seen posts from someone who has real estate professional status talking about how they reduced their income taxes and have become full time real estate investors.

While their claims may not technically be false, they can be misleading. Because for the vast majority of passive investors, real estate investing will not lower your income tax. Keep reading to understand what this means, and to learn one strategy you can use to actually save on your income taxes while expecting to generate consistent future returns. 

Understanding The “Real Estate Professional” Classification 

The person you follow on LinkedIn might be telling the truth about the benefits they’ve experienced from investing in real estate, but that doesn’t mean those same benefits will apply to your investments. 

The only time that real estate investments will actually lower your earned income tax is if you meet the IRS criteria for classification as a real estate professional. 

According to the IRS, to classify as a real estate professional, you must:

  • Spend more than 50% of your time in real property businesses (development, construction, management, brokerage, etc.)
  • Have at least 5% ownership in the real property businesses you’re working for 
  • Materially participate in every real estate transaction you claim deductions for 
  • Work in real property businesses for more than 750 hours in the year 

If you’re a busy, high-paid professional — especially one with a dual income — it is nearly impossible to meet all of these criteria. And if you’re not classified by the IRS as a real estate professional, any tax deductions you claim on your real estate investments will typically not affect your earned, W-2 income tax.

Should You Invest in Real Estate?

Real estate may not lower your income tax, but it does offer other benefits that passive investors can take advantage of. Just make sure you know what you can realistically expect to qualify for and plan accordingly. 

Say, for example, that you make $500,000 from your corporate job this year, and you invest $100,000 of it into a rental property. Your $500,000 of income will generally be taxed at the highest federal rate, around 35%. However, the returns you generate from your rental property will be taxed at a lower rate than the 35%, thanks to incentives like depreciation. 

We often illustrate this idea by talking about the two tax buckets. Returns you earn in the passive income bucket are expected to be taxed at a lower rate, but that doesn’t impact your earned (W-2) income bucket. 

Image of two buckets, one labeled "active income" with the words "W2 income (aka earned income or ordinary income)" inside, and one labeled "passive income" with the words "real estate, royalties, etc." inside.

How to Lower Your Income Tax as a Passive Investor

Real estate is not a vehicle that allows passive investors to lower their income tax, but there is one other vehicle that offers this advantage. 

White and Orange Text on Blue Background: “This Investment Will Cut Your Next Tax Bill Dramatically (It’s not real estate!). Download Now.

When you invest in carbon capture technology, the current U.S. Tax Code allows you to deduct at least 100% of your investment for the first year against your earned income. And with leverage, your depreciation will be calculated as up to 200% the amount of your investment. In this way, you can actually reduce the amount of tax you pay on your earned (W-2) income, which is otherwise taxed at that high rate of 32% or more, while investing in an asset that is expected to provide consistent future returns. 

If you’re an Accredited Investor who finds yourself dreading tax season every year, this opportunity is worth exploring. 

At FGCP™, we’ve invested close to $10 million to date in carbon capture units and proprietary technologies, and we’re proud to have seen consistent returns for our investors. If you’d like to learn more about this opportunity, please fill out this brief form to get in touch.

Disclaimer: All income and tax figures are used strictly for illustrative purposes. Please check with your tax and legal professional as First Generation Capital Partners does not provide tax or legal advice and the above is not intended to or should be construed as such advice. Your specific circumstances may, and likely will, vary.

date
November 9, 2022
author
Billy Keels