Diane Kennedy is a best selling author, CPA, and tax strategist. Years ago, I hired Diane to prepare a tax strategy for me. I’ve been following Diane ever since. You can too by signing up to her website USTaxAid. Also be sure to sign up for my must see webinar: 8 Ways to Shrink Your Taxes by Investing in Real Estate.
Recently, I had the privilege of interviewing Diane and had the opportunity to ask her some tax questions relevant to those professionals in the healthcare industry. That interview was published on the White Coat Investor and can be viewed here.
If you missed that interview, here are some of the highlights:
- The vast majority of doctors are overpaying annually on their taxes
- Taxes are much worse today than they used to be
- Doctors are getting slammed with higher taxes. Things like:
- Medicare surtaxes on W-2 income
- 3.8% tax on passive income
- Top tax bracket increase
- Typical deductions are phasing out
- The trend toward hospital employment is leading to W-2 income for doctors and higher taxes
- You lose deductions with W-2 salaried income
- Not uncommon to pay $10K more in tax for every $50K in income with a W-2 versus 1099
- Home office deduction is viable if it’s exclusively and regularly used for your business
- Claiming 100% of your auto mileage as business related is an audit red-flag
- Real estate investing is “the best thing going” when it comes to tax-advantaged investing
- K-1 paper losses (depreciation) from real estate can be subtracted from K-1 gains from a medical corporation effectively reducing your income tax. This allows you to actively reduce your tax bill
- Tax strategists create a multiyear plan to proactively reduce their clients tax burdens
- On average, Diane saves her clients $28,000 a year in taxes
Having benefitted myself from Diane’s expertise, I wonder how much further ahead would my colleagues be if they paid $28,000 less a year in tax and instead funneled that money into income producing real estate?
During my interview with Diane, we spoke a lot about real estate. While I used some of that material for the article, I saved a lot of it for you the NestEggRx community. Enjoy!
NestEggRx: Can you avoid the 3.8% surtax on passive income by investing in real estate?
US Taxaid: Absolutely you can. In fact, if you have real estate income and you take full advantage of depreciation, you shouldn’t have to pay any tax on that income, including the 3.8% tax.
NestEggRx: I love depreciation. For the benefit of those who may not be familiar with depreciation, can you discuss this tax benefit a little further?
US Taxaid: Sure, I’d be happy to. So historically, in most markets and at most times, real estate goes up in value – it appreciates. And yet, we have this kind of archaic law that we can take advantage of called depreciation. The backbone of that idea is that if you don’t take care of a property, it is going to go down in value.
The IRS has come up with these values that a commercial building can be depreciated over 39 years and a resident occupied building over 27.5 years. That paper loss created from depreciation can cancel out the actual income the investor received creating an untaxed income stream.
NestEggRx: With a benefit like that, is it no wonder why people use real estate to get ahead in life?
US Taxaid: Yeah, no kidding. Let me throw out a strategy we are doing right now with high-income individuals that have their own business.
They can get very aggressive and set up a direct benefit type of pension plan that they can self-direct. I have people putting away six-figures annually doing this. This provides them with a dual benefit. First, they get a big write off against their income. Second, they are rapidly accumulating a large portfolio of real estate that is growing over time and will take care of them in retirement.
NestEggRx: Wow, now that is a strategy that can get a person ahead financially very quickly. Let me switch gears on you a little and ask you about REITs.
Some investors erroneously think that investing in REITs is the same as investing in direct real estate. However, the differences are significant. I can’t tell you how many people are shocked when I show them the volatility of REITs and the high degree of correlation with the stock market. How do you see this issue?
US Taxaid: Yes, you have to understand that while Real Estate Investment Trusts have a basis in real estate, they are actually an investment in stock. As such, they are taxed the same as any other stock. Unfortunately, you don’t get to capitalize on the incredible tax benefits that come with real estate when you invest in a REIT.
NestEggRx: Obviously you and I have benefitted greatly from investing in real estate and taking advantage of the tax incentives that come from real estate. Having said that, can you comment on how real estate investing benefits the next generation?
US Taxaid: Absolutely. In fact, many people view real estate as the absolute best way to transfer wealth to the next generation. You see, upon death, one’s heirs inherit their real estate on a stepped up basis. In other words, the basis resets to current market value and depreciation recapture goes away.
Consequently, one can acquire properties over their lifetime, depreciate them annually, sell and defer the taxes using a 1031 exchange and continue to hold for appreciation and cash-flow. Then when they die, all of that tax that had been deferred simply gets erased permanently.
NestEggRx: What an incredible legacy transfer tool.
US Taxaid: It really is.
NestEggRx: In the final analysis, I like to say that if your investments aren’t tax-advantaged, tax-deferred, or tax-free then you must not be investing in real estate.
US Taxaid: So true.
True it is. If you’d like to take a deeper dive into the incredible world of commercial multifamily real estate investing, then download your free report entitled Evidence Based Investing right now.
To Your Wealth!
Dennis Bethel, M.D.
P.S. Are you paying too much in taxes? If so, you are not going to want to miss my free webinar 8 Ways to Shrink Your Taxes By Investing in Real Estate on October 21st. Sign up now.