How High Earning W2 Professionals Can Maximize Rental Income.

You earn a high six or seven-figure income as a W2 employee.

You are the sole breadwinner for your family.

You’ve got cash you need to put to work.

And you want to reduce your taxes.

So you purchase an investment real estate property.

Only to find out that it will not reduce your taxes. It will actually add to your taxable income.

Here’s why.

You made a 20% down payment, so the property has been cash-flow-positive from day one. It’s a newer property, so there aren’t many improvements or ongoing expenses to deduct. Yes, you get some depreciation each year, but it doesn’t make nearly as much of an impact as you expected it to.

You made a good investment (it’s making money), but your tax situation has remained the same or worse. More income, more taxes.

We’ll discuss two different options for helping you make the most of your new rental property through tax mitigation and savings.

2 ways to leverage your new real estate property for tax benefits today and in the future.

#1 Assuming you own your real estate in an LLC, open a second LLC to help you manage your property.

Your spouse can be the sole owner and operator of this LLC. Your real estate property can use the net income produced after deductions and depreciation to pay for property management.

Your property management LLC can pay your spouse as the sole employee. As a sole owner and operator, your spouse can open a retirement account specifically for sole-member LLC owner-operators. A Solo 401(k).

In 2024, a sole-owner-employee can contribute up to 100% of their income or up to the max of $23,500 to the Solo 401k and up to $30,500 if they are over age 50.

1. Set up a separate LLC for property management.

2. The LLC that owns your rental property pays your property management LLC.

3. Your spouse is the sole employee/owner/operator of the property management LLC.

4. Set up a self-employed retirement account for your spouse operating the property management company - Solo 401k.

5. Contribute 100% of the income paid to your spouse into the solo 401(k) plan.

So, you took the net income from your rental property that would be additional taxable income, redeployed these dollars to pay your property management company, paid your spouse to run the company, and your spouse deferred the self-employed income into a retirement account, ultimately limiting additional ordinary income produced by your nice new piece of real estate.

Consult with a financial professional and tax professional before initiating this strategy to ensure this is applicable and appropriate for your unique situation.

**Depending on how you implement this strategy, you may need to factor in self-employment tax.

#2 An alternative for your children.

Depending on their age, your children could be paid to complete certain tasks for the property management company instead of your spouse. For example, they could mow the lawn, clean the windows, power wash the house, etc. In 2024, children under the age of 18 can be paid up to $14,600 without filing an income tax return.

In this example, you again redeployed net income from your real estate property to your property management company. This time, your property management company paid your children instead of your spouse.

Instead of your spouse making a 401k contribution with earned income to prevent additional ordinary income, the property management LLC paid your children. If your children made less than $14,600, they don’t need to file a tax return, and you did not add to your own income.

With the money your children earn working, you’ve got two options. You can take this money, put it into a regular checking account in their name, and use the funds for expenses you would pay for regardless. Or you can place the money they earned into a Roth IRA in their own names, up to $7,000 in 2024.

Summary

1. Tax Challenges of Rental Property Ownership:

   • High-earning W2 employees who invest in rental properties often find that these investments can increase their taxable income rather than reduce it. This is due to the nature of passive losses, which cannot be deducted against W2 income unless you earn less than $100,000 per year or are actively in the real estate business. Despite making a good investment, cash-flow-positive properties, especially newer ones with limited expenses, offer minimal tax relief through depreciation​.

2. Strategy 1: Using an LLC for Property Management and Retirement Savings with your spouse:

   • A strategy to mitigate taxes involves setting up a second LLC for property management, with a spouse as the sole owner and operator. The rental property LLC can pay the management LLC for property management services, and the spouse can be compensated for managing the property. This income can then be contributed to a Solo 401(k), allowing deferral of income and reducing taxable income. This setup effectively redeploys the rental property's net income into retirement savings, limiting additional ordinary income​​.

3. Strategy 2: Employing Children for Tax Efficiency:

   • An alternative strategy involves paying children under 18 for tasks related to the property management business, such as lawn care or cleaning. In 2024, children can earn up to $14,600 without needing to file a tax return. This allows the net income from the rental property to be used for family expenses or contributed to a Roth IRA in the child's name. This approach avoids adding to the parent's taxable income while providing savings or investment opportunities for the children​​.

Both strategies require careful planning and consultation with financial and tax professionals to ensure compliance and optimal benefit.

Securities offered through LPL Financial, Member FINRA/ SIPC. Investment advice offered through IHT Wealth Management, a registered investment advisor. IHT Wealth Management and AutomotiveWealth are separate entities from LPL Financial.

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