Real Estate Tax Deduction for a Physician Investor
“Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket.” – Robert Kiyosaki
If you are reading this article, I assume that you are well versed on the basics of syndication investments – Real Estate Syndication definition, Real Estate Syndication structure, real estate process, and real estate returns. In this article you will learn about real estate tax deduction for a physician investor.
Introduction | Real Estate Tax Deduction
Physician investors make real estate profits from their syndication investments. When an investor invests in a Real Estate Syndication, they own a piece of that Real Estate Syndication property. Real estate profits can come in several ways:
- Cash distributions from the cash flow, on a monthly or quarterly basis;
- Proceeds from refinancing the property; and
- Proceeds from the eventual sale of the property.
As we all know, any income we make, Uncle Sam would like to know about it and wants a piece of it.
How Do You Deduct Taxes in Real Estate?
Real Estate Tax Deduction | Take Advantage of Tax Shelters
- Tax deductions from the property will be passed on to the investors. Investors will receive an annual K1 form to file with their annual taxes. Tax deductions include:
- Depreciation
- Property Taxes
- Interest on the Mortgage Debt
- When the property is refinanced, investors will receive a big check. This is considered a return on your equity, and it is not taxable. You will not pay any taxes on this income.
- When the property is sold, you will get your final sales proceeds. Assuming that the property was held for more than a year, investors will qualify for long term capital gains. Long-term capital gains are typically taxed at lower rates compared to short-term capital gains.
Real Estate Tax Deductions Using Retirement Accounts
Investing with Retirement Accounts (e.g. Self-directed 401k)
- Several syndication investments allow you to invest in the syndications with your retirement accounts.
- If you have money in your 401k or 453b or other form of retirement accounts, you can move that into a self directed IRA, invest into the syndication with your self directed IRA.
- Real estate profits from the syndication investment can grow tax deferred if you invest with a tax deferred retirement account.
- I wrote a detailed blog post about how to use your retirement accounts to fund your real estate deals (e.g. self-directed 401k).
1031 Real Estate Exchange Rules and Real Estate Syndication Investments for a Physician Investor
- 1031 real estate exchange rules means your original investment and real estate profit from it can be rolled into another opportunity without a taxable event at the sale of the prior property.
- This allows you to defer your long-term capital gains tax.
- Very few syndication operators are able to do 1031 Exchanges for syndication investments. However, this is extremely rare, works for only certain kinds of properties, and requires a very complicated structure.
- Whenever someone offers a 1031 option in a syndication investment, make sure you consult with an experienced law firm with real estate and taxation expertise. Since these are not a common or simple form of investments, I will not go into the details of it.
I have explained the 1031 exchange definition and the benefits of 1031 real estate exchange for a physician investor in a separate blog post.
Real Estate Professional Status (REPS)
- Majority of the tax benefits apply only to the gains you make on the real estate investments. Passive losses cannot usually be carried on to your W-2 income to shelter the W-2 income from being taxed – EXCEPT in one situation. This is called Real Estate Professional status. Read this blog post to understand the details of REP status, to check if you qualify for it in order to shelter your W-2 income from being taxed.
- This is a super secret tax-saving strategy that very few people know about. Make sure you learn about it and take advantage of it if you qualify as one.
If you have already invested in a Real Estate Syndication deal and started to make profits, please share your tax saving strategies in the comments below.
You will find the rest of the topics regarding Real Estate Syndications for a physician investor here.
Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How.
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