How to (Legally) Pay the Least Amount in Taxes as a Real Estate Investor

0:00If you skip this episode, you could be leaving thousands of dollars on the table. They say there's only two things guaranteed in life, death and taxes. And since you're alive watching this right now, today we're going to focus on the latter, how real estate investors can legally pay less tax. And things have changed a lot this year, big time. The big, beautiful bill tax provisions are going into effect for this April's tax deadline, and it has huge implications for real estate investors. And that's true whether you own one rental or an entire portfolio. The strategies we're sharing today, they can save you hundreds, thousands, or even tens of thousands of dollars over the lifetime of your investments.

0:40In this episode, we're also going to share the under-the-radar tax strategy that 99 % of investors are missing out on, and we'll have a CPA tell us what you need to do today so you're never scrambling during tax time again.

0:59Hey, what's up, everyone? I'm Dave Meyer, Chief Investment Officer at BiggerPockets. Today's guest on the show is Amanda Hahn. If you haven't heard Amanda before, she's been on the show a lot, but she's an expert. She's a CPA, a tax strategist, and she's a real estate investor herself. She specializes in helping investors pay the least amount of possible taxes legally. And since April 15th is coming sooner than any of us hope or think, let's bring out Amanda and learn together how to save some money this year. Amanda Hahn, welcome back to the BiggerPockets podcast. Thanks so much for being here.

1:34Amanda Han:Yeah, thanks for having me, Dave. I'm super excited to be back. Well, we've had you on the show many times, but some in our audience may not know who you are yet. So can you just introduce yourself for us? Of course. Hi, everyone. My name is Amanda Hahn. And what I always tell people is that I am a CPA by day. And by nighttime, I am, like many of you, a real estate investor. My husband and I co-authored the two BiggerPockets tax books. So if you haven't checked those out, make sure to do so. One of my passions is really in helping to educate people on all the different things they can do to use real estate to not just build wealth, but also to save a significant amount in taxes if you do things correctly.

2:16Amanda Han:So really excited to be here. It's that time of the year when taxes are top of mind. It is. Well, thanks for joining us today. And if you haven't read Amanda's book and you want to save money on taxes, it's the single best thing that you could do. I self-admittedly, Amanda, you know this about me, I'm terrible at this stuff. I'm not good at tax strategy, but I've gotten better because of reading Amanda's books and getting to know her. So definitely check that out. But hopefully we'll give you a little taste of the kind of stuff that you can learn here in this episode. So, Amanda, maybe just break it down for us, for people who might be new to investing or for those who are just scaling their portfolio.

2:54I think a lot of us, it takes a little time to realize that you should be thinking about taxes. What are sort of the big buckets of tax strategy that investors should be thinking about?

3:04Amanda Han:Yeah, well, we'll start at the basics, which is that it's important to understand when you invest in real estate, you are actually a business owner in the eyes of the IRS. And so, you know, we hear people talk a lot about how tax law favors business owners when it comes to write-offs, deductions, depreciation. And so it's really important to understand that as a real estate investor, I am now able to take advantage of a lot of those same tax benefits and deductions that the traditional business owner has access to. and this is true regardless of whether we own our rentals in our individual name or in our trust or in an LLC.

3:45We call it real estate investing but it really is just entrepreneurship. You're starting a small business to own real estate just like any other service business or business that you create and that is good. That's a good thing for real estate investing. That's why you get better tax benefits than if you were to go out and buy stock or cryptocurrency or anything like that. That's why real estate has so many advantages. So what are the big things that people should be thinking about as they enter tax season right now?

4:15Amanda Han:You know, what's really interesting is when we work with investors all over the U.S. on proactive tax planning, about 40 percent of tax returns that we review from previous years are not optimized for tax savings. And I can share some of the most common mistakes I see. And I think these are kind of the things that we should all keep in mind as we get ready for tax season. And we'll start with just capturing expenses. As real estate investors, I think we're all really good at making sure we write off our mortgage interest and property taxes and management fees. But some of those common missed deductions, even insurance, property insurance is one that we see missed pretty frequently.

4:52Amanda Han:And it's really strange because we all have property insurance. But just some of the overhead things. Home office, most real estate investors manage their rentals from their home. Very few people actually go out and rent an office space. So if you have an eligible office, make sure you are claiming it because it does help you to save on taxes either today or sometime in the future, depending on your facts and circumstances. But just overhead expenses, going to BiggerPockets conference, your BiggerPockets membership, buying a tax book, for example, using your car for business, right? Yeah, absolutely.

5:28For sure. I always wonder about like travel. Is that something that you can deduct? Like I invest out of state. And so sometimes I'm going to visit the Midwest and I'm staying at hotels. That's something I can deduct, right?

5:40Amanda Han:Yeah, for sure. And you actually it's not a requirement that you own rental properties in a state in order to take a tax deduction. What is required is that you're able to demonstrate the main reason for that travel is related to real estate activities. So, for example, if I didn't own any properties in Orlando, but I'm going to Orlando for a Bigger Pockets conference, that travel itself should be tax deductible. the flights, the hotels, the food when I'm there. And same thing if I happen to have a trip planned to go to Ohio to look for rental properties. Even though I don't end up buying any properties, my travel costs could be deductible as long as I can show I went there for the purpose of looking for real estate, touring properties and things like that.

6:26So I want everyone to listen to that because this is something that comes out up a lot. When we talk about out-of-state investing, people don't go and visit markets that they're considering investing in, and I always encourage people to do it. It's a big expense. I understand that, but it is tax deductible in most situations. So that does take the sting out of it a little bit. It is a business expense and encourage you to think about it. So that's one big thing people should be thinking about in their returns, right? Expenses. What else is there?

6:54Amanda Han:Well, along this kind of a similar line, oftentimes when we review tax returns, obviously one of the big things we look at is depreciation, our ability to take a paper loss on the purchase price of the rental building we purchased. And very frequently we'll see the depreciation as a very round number. So$500 ,000 for Main Street or$200 ,000 for Fremont Street. And that usually jumps out to me as not really capturing all of our costs associated with the acquisition of a property. Because we all know when we buy a property, we're not just paying the purchase price of it. We are also paying closing costs.

7:35Amanda Han:And there is different allocated or prorated property taxes, insurance, and all those. So one thing we can do for any of you who've purchased a property during the year, sold the property, refinanced on a property, make sure you send your closing disclosure to your accountant as you get ready to meet them, because then they can take the closing disclosure and pull out all of those associated expenses beyond just you telling them what the purchase price is. Okay, that's a very good tip. And how big of a difference does it make? Like if you have an average rental property, it's$400 ,000, you're making some cashflow off of it.

8:13How big of a difference in your tax is it when you prepare the tax right and when you do it sort of just haphazardly?

8:21Amanda Han:Oh, you know, the answer really depends from person to person. right? Because one question is going to be, what is your tax rate? If you're someone who is in a high tax bracket because you make a lot of income from other sources, then even$1 ,000 of a deduction could save you$500 in actual cash. And for some people, that's a decent amount. I think for anyone, I would never throw away$500 for no good reason. But if you have a good system to track your expenses, those items add up over time. So if you're able to utilize it this year to offset your taxes, great. If you can't because of passive activity limitations in the tax world, I always encourage clients still track them, send it to your accountant, because you want to make sure it's reported.

9:10Amanda Han:Because even the expenses that you cannot utilize today, you never lose them, you get to utilize them some point in the future. Yeah, in an era of real estate investing where it's super hard to find cash flow. This is cash flow. We often treat taxes as this separate income source or something different to think about in real estate. But as Amanda just said, she used a modest example of if you can save$500, that's reasonable. If you could save$1 ,200, that's$100 a month in cash flow. That could change your cash on cash return from 3 % to 6 % in a given year if you're actually just doing this right.

9:49And it's one of the ways I think you could just keep more money in your pocket. And that really has measurable differences in your actual overall return profile.

9:59Amanda Han:Yeah. I mean, I used a very small example, but if we go to the other extreme and say, well, how impactful could that be in real life? If we're talking about somebody who invested in a rental property where the building was $400 ,000. With the current law where we have 100 % bonus depreciation, that could be$120 ,000 of a deduction just in the first year. If you're in a 50 % tax bracket, that could be$60 ,000 in tax saving. So we're saying, okay, save 500 or save 60 ,000. I love both of those. Yeah. Sign me up 100%. All right. So those are some great basics that everyone, whether you're just starting or have a big portfolio, should be listening to.

10:46Of course, this year, we have some exciting tax stuff, I think, from a real estate investing perspective, where many of the provisions that were passed last year in the One Big Beautiful Bill Act are starting to go in effect. So I want to pick your brain on that a little bit, Amanda. We do have to take one quick break. We'll be right back. Do you ever notice how every passive investment somehow turns into a very active lifestyle? Active spreadsheets, active phone calls, active stress. Here's a better question. What if you could buy brand new construction homes, 10 % below market value, in the best markets across the country without making real estate your second job?

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14:16Welcome back to the BiggerPockets podcast. I'm here with Amanda Hahn talking about tax strategy. It's the beginning of the year. It's time that we all start thinking about this. Amanda enlightened us before the break. just on how you should be thinking about capturing your expenses on a property level and how to maximize your deduction so you can keep more money in your pocket. A lot of things are changing, though, Amanda. It's not just the same old, same old in tax world for real estate investors. So maybe you can give us a high-level overview of what has changed and what's in the big, beautiful bill act that is relevant for real estate investors.

14:54Amanda Han:Yes. Well, I mean, not surprisingly, with the current administration, the One Big Beautiful Bill included a ton of very amazing benefits for real estate investors. One that, you know, I think everybody was really excited for was the return of 100 % bonus depreciation. Previous to that, we can always take depreciation on our rental properties. But under the old law, if there hasn't been changes this year, bonus depreciation would have only been at 20%. So with the change of the law, now bonus depreciation for 2026 is at 100%, which effectively means, you know, if you bought a property after January 19th of 2025 or any time in 2026 and the foreseeable future, not only do we get to take depreciation on our rental properties, but that amount is supercharged, meaning we can take a very significant tax benefit upfront rather than the traditional rule of having to wait over a significant number of years to take a tax write-off for it.

16:01And maybe you could just help us understand what is the benefit of front-loading depreciation, And what are some instances or circumstances where you recommend that for real estate investors?

16:11Amanda Han:For sure. The purpose or the benefit of accelerated depreciation, basically saying rather than waiting over time to take a tax benefit on the purchase price of my rental building, I'm going to do what's called a cost segregation study. And what that does is it allows me to then take faster depreciation this year and maybe the next few years rather than having to wait. So effectively, we're looking at the time value of money, of savings. In other words, I know I have to pay taxes to the IRS. I can either pay it now or I can pay it slowly over the next 27 or 39 years. And if I choose to pay my taxes later, that means I'm able to keep my cash longer with me today and reinvest and grow that money today rather than just give me it to the IRS.

16:58Amanda Han:So that's where the concept of it. Now, I will say it is not for everyone. So don't run out and start taking accelerated depreciation just because you hear it here. The ideal profile of when you want to take accelerated depreciation are in years when you can actually benefit from it. So that would be years where you have high taxable income and or years where you can actually utilize rental losses to offset that different set of income that you're generating, whether it's from a W-2 or a business that you operate. And so conversely, who should not do a cost segregation? Well, you should not accelerate depreciation if you're not able to utilize it this year.

17:38For someone like me or maybe for someone else who has a W-2 job, is bonus depreciation and doing the cost seg even worth it?

17:46Amanda Han:Another great time to do cost segregation is if you have a gain. So let's say I have a portfolio, but I sold one rental for a huge gain and I didn't want to 1031 exchange or use other strategies. I could also consider doing a cost segregation on one of the properties of my existing portfolio and try to offset one with the other. So you can actually take the depreciation from one portfolio property and apply it to another one, even if you're not a real estate professional? Yep, exactly. Love that. And I will say one other thing, since we're on the topic of someone who is not a real estate professional, you may have been told by your accountant that there is no tax benefit to you investing in real estate.

18:27Amanda Han:because either you work full time or you make too much money. And when you hear that from an accountant, they're doing what I called tunnel visioning because all they're saying is, for example, Dave, you're not going to see a huge benefit this year in owning rental real estate because you're still going to pay taxes on your W-2 income. But what they're not factoring in are the different benefits, which is I generated rental cash flow that I'm not paying taxes on. Right. And also in the future, when I generate future cash flow, I may not have to pay taxes on. And also the most important part, which is at the end of my investment with this specific property, if I were to sell it at that point, I can actually use all of the accumulated losses from that property to reduce not just the capital gains from the sale, but also W-2 and all other income as well.

19:19Amanda Han:So there's absolutely benefit to being a real estate investor. it's just a timing of when somebody actually sees that. One of the things I struggled with early in my investing career is you look at these things, you say, oh, I'm going to pay this tax eventually if I just defer it. And at least for me, I didn't really appreciate the time value of money element. Like I can keep more principle in my pocket and use that to go buy other investment properties to make renovations on my properties. And in addition to just delaying that, this is getting nerdy about it, but you also wind up paying your taxes in inflated devalue dollars over time too.

19:58So you're purchasing power. Part of the idea of the time value is money is your money is worth today more than it's worth in the future. And so if you can hold onto it and use it to build your portfolio currently, then it's better to invest a hundred dollars today than it is a hundred dollars several years from now. And so that's one of the main things about tax strategy that real estate allows you to do. And that's kind of the same idea behind like a 1031 too, right? Like you eventually, in theory, at least have to pay that tax. But like if you can defer that and go out and save the 20 % on capital gains and just go buy another property, it means you just have more purchasing power, which is so powerful, especially earlier in your investing career.

20:38So anyway, long conversation here about bonus depreciation, depreciation in general, Anything else from the One Big Beautiful Bill Act that our audience should know about?

20:47Amanda Han:Yeah, well, beyond bonus depreciation, one of the good things about the One Big Beautiful Bill is that we were able to retain the tax benefit that's called Qualified Business Income Deduction, QBI for short. So that was something that was available that was then extended as part of the One Big Beautiful Bill. And basically, the reason we care about that as real estate investors, is QBI basically allows certain types of business income to have tax-free treatment up to 20%. So an example could be if, you know, I've owned my rentals for many years and even after using depreciation and cost segregation, I just, I have to pay taxes.

21:30Amanda Han:There's taxable income. Well, under QBI, if I had$100 worth of taxable income, I may only have to pay taxes on$80 of it, which means$20 of my taxable rental income could be completely tax-free. And this doesn't just apply to rental income, it applies to all different types of income, specifically in real estate as well. So for those of you who are flipping properties, doing wholesale, or if you're a property manager, co-hosting, you know, all of the different types, up to 20 % of that taxable income could potentially be tax-free under QBI deduction. And that is something we enjoy for 2025 as well as 2026.

22:14Amazing. Finally, a tax win for flippers and wholesalers. Honestly, as you're listening to Amanda, most of the benefits for real estate investors come with buy and hold styles of investing. It doesn't need to be rentals. A lot of them still apply for short-term rentals or midterm rentals, but it's kind of a buy and hold. The transactional kind of real estate doesn't always get the same treatment, but QBI is a great example.