In this episode, Wayne talks to Susan Geist, PMP, who grew up in a lower-class family in rural Appalachia and began investing in real estate in 2008. Eventually, she achieved a portfolio that now generates over 5-figures in passive income each month. Using strategic investment deductions, she reduced her annual federal tax bill from $137k to $6k while increasing her W-2 and investment income. Her current multi-million-dollar real estate portfolio consists of both long- and short-term rentals, in addition to limited partnerships in apartments, car washes, self-storage, hotels, and mobile home parks nationwide.
Through her company Rising Femme Wealth, LLC, Susan provides financial education workshops and investment coaching to empower other women with the strategies and confidence to grow their wealth, reduce their tax bills, and achieve financial independence.
Topics on Today’s Episode:
- Susan introduces herself and provides a disclaimer. Susan is not a lawyer, CPA, or certified financial advisor, and does not offer legal or tax advice. The information she shares is only for educational purposes, and everyone should do their own due diligence.
- How Susan went from a humble beginning in rural Appalachia to building a current portfolio that generates over 5 figures monthly passive income. She found inspiration to grow wealth and promote financial independence, through her mother’s experience. Susan also provides some details about her personal portfolio.
- What is tax optimization and why you should do it? The 2 biggest wealth killers are taxes and inflation.
- Tax laws were fundamentally put in place to shape the economy; tax shelters were put in place to promote housing and job creation. The government rewards investment into these sectors and not utilizing the tax deductions legally available to you is stealing from yourself and your family.
- Most CPAs are not trained in real estate investment so they can only offer limited advice, it is up to each individual investor to become educated in real estate specific tax shelters. Knowledge is power over your personal tax situation.
- “Tax buckets” and Depreciation. The IRS splits your income into 3 distinct buckets: active, portfolio, and passive. Gains and losses in each bucket are separated and typically cannot be combined.
- Active income: W2 income, running a business or an LLC, or if you have Real Estate Professional status. Short-term rentals are considered an active business if self-managed, as is active house flipping as your primary job. Active income incurs income taxes as well as 15.3% self-employment tax.
- If your AGI is below $100,000 per year, you can take up to $25k in passive real estate losses-One of the few places passive and active income might interact.
- Portfolio income: Stock and bond sales, dividends, interest from accounts or owner financing interest, and sales of non-business assets such as a non-rental home. These are taxed as capital gains or losses.
- Passive income: Rental income whether single family homes or syndication, royalties, and short-term rentals if you have a management company.
- Real estate (buildings only), equipment, or capital asset depreciation, allows you to generate a paper loss on the tax return without losing money. The depreciation amount changes with lifespan divided by value. Building lifespans are either 27.5 or 39 years.
- Cost Segregation separates components of the business asset that depreciate faster than the building overall such as appliances, flooring, fixtures, etc.
- Bonus depreciation allows more of the depreciation loss in year 1.
- Depreciation recapture at the sale of the property is taxed at the ordinary income rate up to 25%, rather than lower capital gains tax. Because of potentially higher tax rates, consider taxes at exit and opportunity for 1031 etc.
- Tax loss harvesting can be a helpful technique to reduce capital gains tax on passive income. A limit of $3k in losses can be used on active income and the remainder of loss can reduce capital gains on stock, non-business property sale, etc.
- Investing in real estate syndications offers passive losses through depreciation and cost segregation.
- A work vehicle over 6000lb also provides another opportunity for depreciation losses, without recapture under certain circumstances.
- For couples involved in real estate, one partner without a W2 could obtain REPS (Real Estate Professional Status) could be a great strategy to avoid taxes. This would allow you to take all passive real estate income and move it to active earnings to offset W2, much like self-managing a short-term rental.
- Online training and Workshops offered by Susan Geist:
- Sensational Investing the Financial Security Formula-How to set up an income generating portfolio)
- Tax strategies and Planning-Expands on topics mentioned here
- Personal Coaching Sessions
- Does 27 ½ years exclude the age of the residential property? No matter the age, 27.5 years is the depreciation time for residential property.
- Can we extend the depreciation to W2 income? Most of the time, no, unless you have Real Estate Professional Status
- What is the tax effect of participating in real estate syndication? K-1s are issued from the syndication LLC listing passive income and losses generated through depreciation after a cost segregation. Losses can carry forward to offset future gains.
- I thought losses were limited to $3,000? How did you get more? Capital losses up to $3,000 can be used to reduce W2/active income, but additional capital losses can be used to offset capital gains.
- How do you see solar panels and associated tax credits? Solar panels take a lot of time, if they ever make your money back. So, do your math to make sure the investment makes sense. Otherwise, check with a CPA on this tax credit in your situation.
- Did you purchase the short-term rental for tax benefits? It is not cash flowing very well due to the economy, but yes, it was purchased for tax benefits. As a short-term rental being used as an active business, it is a 39-year depreciation. Susan also did a cost segregation study and used accelerated bonus depreciation on that property. Leverages debt to utilize tax benefits that yield funds available to reinvest.
- Does depreciation affect the land value or just the property? Just the structure is depreciated, not the land.
- Are there specific cost segregation firms? Yes, there are specific firms. Engineering-based firms focus on commercial properties, and some online firms will perform cost segregation for single-family homes at lower cost. The cost is also deductible.
- How much time is spent actively managing the active short-term rental? At least 100 hours per year must be spent on the property and it must be documented.
Links and Resources:
Texas Multi-Family Passive and Active Investors Meetup (Austin, TX) | Meetup
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