I started investing in commercial real estate in 2017.
At the time, I thought I was simply buying a new office for MAK construction.
“Better to own than rent, right?”
That was as far as I thought.
Little did I know — I was about to give myself “cheat codes” for growing MAK and my personal wealth to the next level.
Fast forward six years and 200+ commercial units later.
In today’s edition of Unfollow the Herd, I’m sharing 5 cheat codes to wealth that real estate investors get to leverage.
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🚨 Quick disclaimer: nothing in this newsletter is financial advice. Consult with a qualified financial professional and do your research.
Okay, let’s dive in!
Mortgage Interest Deduction
You’ll notice most of these wealth “hacks” have something in common:
They lower your tax bill.
U.S. tax laws are heavily in favor of two groups:
Investors
The mortgage interest deduction is one of the best cheat codes available to all real estate investors and homeowners.
Here’s how it works:
You buy a rental property
You probably have a mortgage
You pay interest on the mortgage
You can deduct the interest against rental income
For rental real estate properties, mortgage interest is a business deduction.
For example: if you earned $35,000 in rental income and paid $10,000 in mortgage interest during the year and your marginal tax rate is 25%, you could potentially save $2,500 in taxes.
Real Estate Business Expenses
Mortgage interest isn’t the only business deduction that can lower your tax bill on rental income.
Here are other expenses you’re allowed to deduct on a rental property:
Property taxes can be deducted from your rental income.
Repairs and maintenance expenses are generally deductible. This can include things like painting, plumbing repairs, and HVAC maintenance.
Utilities: If you pay for electricity, gas, water, or internet for your rental property, you may be able to deduct these expenses.
Insurance premiums for your rental property, such as property insurance and liability insurance.
Property management fees: If you use a property management company to manage your rental property, you can deduct the fees paid to the company.
Advertising: You can deduct the cost of advertising your rental property, such as classified ads, flyers, and signage.
Legal and professional fees: If you hire a lawyer or other professional to help with your rental property, such as drafting a lease agreement, you can deduct the fees paid.
Depreciation: The cost of the property itself is not deductible, but you can deduct the cost of its depreciation over time.
Get a good CPA to help you maximize these deductions.
Cost Segregation
Speaking of depreciation…
Cost segregation deserves its own section. It’s a serious tax-savings hack for real estate investors.
When you buy a property, you typically have to depreciate it over a certain period of time (e.g., 27.5 years for residential property).
But cost segregation allows you to break down the components of the property into separate categories — land, building, and personal property — and use different depreciation schedules for each category.
This can accelerate depreciation, increase cash flow, and reduce your tax bill in a major way.
For example: if you own a commercial property, you may be able to use cost segregation to reduce your tax liability by tens of thousands of dollars each year.
Capital Gains Tax Rates
We are “buy-and-hold” investors at Mak Capital.
Part of the reason…
Long-term investors get lower tax rates on gains if you decide to sell in the future.
Yet another investor-friendly tax law: capital gains tax rates.
If you hold onto a property for more than a year before selling it, you will be subject to the long-term capital gains tax rate, which is much lower than the short-term rate.
For example: if you sell a property for $500,000 that you bought for $300,000, you could potentially save thousands of dollars in taxes by taking advantage of the long-term capital gains tax rate.
1031 Exchange
What if you want to sell, then reinvest in a bigger property?
There’s a law that allows you to defer your gains (pay taxes later) if you reinvest the funds in another qualifying property.
It’s called a 1031 Exchange.
If you identify a replacement property in writing within 45 days and buy a new property within 180 days…
You can defer any capital gains taxes on the sale of the rental property.
For example: if you sell a property with a $500,000 capital gain (500k * 15% tax rate = $75k tax bill) and reinvest that money into a new property, you can defer paying taxes on the $500,000 until you sell the new property.
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Real Estate Investor OS: Learn the exact strategies that helped me build a $20M real estate portfolio. This 2-hour course equips you with the tools you need to build financial freedom through real estate investing
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Until next time, folks.
💸 🏡 📈
- Marc Kuhn
P.S. I would love it if you shared this with a friend.
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