How Real Estate Investors Pay $0 In Taxes (Legally)

本站添加: 2026-05-19

[00:00:00]Number two is taking advantage of the depreciation deduction. Now, one of the most powerful ways to take advantage of this depreciation deduction is to use it through real estate. This is why you have so many real estate investors that make huge sums of money and pay little to no money in taxes and it's legal.

[00:00:15]It's through this thing called the depreciation deduction. And the way that it works is you buy a property and then you get to write off the value of the property against your income even if the value of property is going up. Let me diagram this out for you. Let's assume you're going to go and buy a $400,000 property and to keep it simple you're going to go and buy the single family house, this $400,000 house, but you're not going to buy it to live in yourself, you're going to buy it to rent out to other people. Now, the first thing you have to understand is what's the actual value of the house versus the value of the land that you purchased and let's just say that this land that the house sits on is worth $80,000, which means this house, the actual building is $320,000 of value right here. The reason why you have to understand this is because you can only take this depreciation deduction against the value of the actual property, you cannot depreciate the value of the land.

[00:01:08]So, now what you do and I'm going to assume that you buy this all cash. It doesn't matter if you get a mortgage. I know a lot of people are going to buy real estate with mortgages. Just for simplicity, so you understand the tax game, I'm going to assume that you bought it with cash. You bought this $400,000 house with cash and you're going to rent it out to somebody else and they're going to pay you, let's just say $4,000 a month. Well, now out of this $4,000 a month you're going to have to pay expenses. You got to pay your property taxes, you got to pay insurance, you got to pay for the maintenance because anytime the toilet breaks you got to pay to fix that, you got to pay the property manager because I don't want you to go out and fix the toilet yourself, I want a property manager to deal with all the tenant stuff. And then you have to also cover the vacancy costs because sometimes you're not going to have a tenant out there paying rent. Now, a very simple rule of thumb is that your expenses might cost 50% of your rent.

[00:01:56]I'm not talking about the mortgage. So, your expenses here, let's just say are $2,000 a month, which means you are profiting $2,000 a month on this property. You have 12 months a year, which means you're going to make right around $24,000 a month in profit. Now, if I was actually doing the numbers myself to buy this property, I would take the expenses and actually make it about 60% because I like to round up my expenses, but this is not a real estate video, this is a tax video.

[00:02:27]So, you make $24,000 not a month, a year in income from this property. And normally you're going to have a $24,000 taxable income that you're going to have to pay taxes on.

[00:02:38]But, because you are a real estate investor, the IRS tax code says we want to incentivize people to invest in real estate, build real estate, buy real estate, not to live in, but to rent out to other people.

[00:02:49]And so, what do they do? They give you tax breaks. And so now, this is where you can take advantage of the depreciation deduction. What the IRS says is when you buy a single-family house to rent out to other people, you take the value of the property, the house, in this case is $320,000.

[00:03:05]You divide it by 27 and 1/2. That's just what the IRS says. It's just a number that they came up with. And that is a deduction that you get to take every single year for the next 27 and 1/2 years. So, I already did the math.

[00:03:16]$320,000 divided by 27 and 1/2 means that I get to qualify for an $11,600 tax deduction every year.

[00:03:29]Which means I'm not going to pay taxes on $24,000. I'm only going to pay taxes on $12,400.

[00:03:39]That is what I'm going to pay taxes on, which means I made 24 grand. That's how much money is in my bank account. I get this paper tax deduction. And when I say paper tax deduction, that means it's only on paper. It's not actual money leaving my bank account.

[00:03:51]That's the money that I pay taxes on, which means I get to make my money, pay less money in taxes. Now, you're going to say, "Jaspreet, the title of this video is paying $0 in taxes.

[00:04:00]If you're making $12,000, you still have to pay taxes." Well, this is just the beginning of the depreciation deduction.

[00:04:05]You got to let me finish the section.

[00:04:07]Keeping up with the economy is not an easy thing to do. And then when you have all these crazy things happening, it makes it so much more difficult not to get caught up in the political mess, and that's why I created Market Briefs. It's a free newsletter for investors that breaks down what's happening in the economy without all the politics and without all the fluff. It's a quick 5-minute read. We break down what's happening in things like the economy, housing market, stock market, crypto market, and global economy into a fun, witty, and easy to read newsletter. It's read by hundreds of thousands of investors every single morning, and as an added bonus, when you sign up for Market Briefs, which is free, you're also going to get my investing masterclass where I walk you through how you can started as an investor and find hidden investment opportunities before they hit the headlines. I'll show you the exact framework that my firm uses to research investment opportunities. So, if you want to get the investing masterclass and Market Briefs all for free, all you have to do is sign up, and I have the link for you down in the description below. [clears throat] Now, what we're going to do is run through this exact same scenario again, but by this time you've already watched this video by Jaspreet Singh, and you got yourself a good accountant. And now what you say is, "Hmm, I'll buy this $320,000. I got a good accountant, and we do something called accelerated depreciation."

[00:05:17]Now, what that means is essentially, we're going to go through this property with your accountant, and we're going to accelerate how much depreciation that we can take in the early years. Because what depreciation is telling the IRS is, "Hey, this property is one year older, so I deserve a tax write-off because of all the wear and tear that happens in the property." You get this depreciation deduction even if the value of the property is going up. But when you do accelerated depreciation, what you're saying is, "Hey, the pipes in this property are going to depreciate faster, the rugs and the carpet are going to depreciate faster, the walls are going to depreciate faster. So, I shouldn't actually just do this basic depreciation. This is just what the IRS gives you if you do no work at all.

[00:05:57]If you do some more work and you do the accelerated depreciation because of something called a cost segregation analysis, which is where you're going through the property and you're depreciating different parts of the property at different speeds, now you can say, "I'm actually going to get a faster depreciation in the first year."

[00:06:13]Now, maybe it is a $50,000 depreciation write-off in the first year. So, now what happens? The same situation. You made $24,000 in income. That's the money that's sitting in your bank account. And now with this accelerated depreciation, you tell the IRS that I deserve a $50,000 tax break in the first year because you did this cost segregation study with your accountant. And now what happens is your income is negative $26,000.

[00:06:51]You made $24,000. Do you know what your tax bill is on negative $26,000 of taxable income?

[00:06:56]It is, finishing up the math, oh, $0.

[00:07:00]Which means now your tax bill is zero and then you can use this $26,000 in some strategic ways. And I say in some strategic ways because you can't just use this $26,000 as a way to offset your job income unless you qualify to do that. So, how do you qualify to do this? Well, rule number one is if you make under $100,000 a year, you can take up to a $25,000 and use it to offset your W-2 income.

[00:07:30]So, let's just say you make $99,000 a year from your job.

[00:07:36]And now the IRS says you can take up to $25,000 from this loss and use it to offset your job income, which means now you can take this $25,000 loss out of this $26,000 and now you're only going to pay taxes on $74,000 of income from your job. You made $24,000. This is sitting in your real estate investment bank account. You made $99,000 from your job. This is sitting in your personal bank account that you made.

[00:08:05]But you're only going to pay taxes on 74 grand out of this and you're going to pay $0 in taxes on this.

[00:08:10]Now if you make more than $100,000 a year, this write-off gets phased out and after $150,000 a year of income, you can write off $0 from this loss against your business income or your job income unless you qualify for another exemption. The next exemption is a lot more difficult, but this is now you are a real estate professional. This means that either you or your spouse is a full-time real estate person that is in the business of managing your real estate and now you have to show with the number of hours and amount of time that you spend on this property that most of your job or your spouse's job is managing this real estate portfolio. Now what happens is it doesn't matter if you're making $100,000 a year or a million dollars a year, you can offset this loss to offset your other active income.

[00:08:56]This is how many people are making huge sums of money in real estate and paying little to no money in taxes and it's 100% legal. If you enjoyed this clip and you want to continue your financial education journey, I have another video that I think you'll love. All you got to do is click that button right over there and for those of you who want to stay up-to-date on the top finance and business news, you can join Market Briefs, my free financial newsletter, by clicking that button below.

[00:09:21]>> [clears throat] >> Thank you for watching and I'll see you in the next one.