Minimizing taxes with higher RE income

[DawgMan]

I know there is no simple answer here and most answers start with "depends", but interested to hear from any of you who are pulling higher RE incomes (unearned income) and how you are managing your tax burdens. I am underwriting an annual pull of about $300K/yr once I launch in about 18 months (age 55). This budget has significant discretionary play in it so I have plenty of flexibility if I need to spend less. Most of my assets are in the market at a 60/40 AA split 1/2 tax deferred accts, 1/2 taxable accts. I also have a sprinkle left of investment real estate that pays a min return of around 8%/yr. I have tried to right size my accts for now to minimize current taxes. Running some iOrp models, it is telling me to draw down from my taxable accts until 59 1/2 and then start some combo thereafter (somewhat expected). This will obviously help significantly reduce my tax burden the first 5 yrs, but at some point I will be dealing with RMDs so trying to balance the short term and long term tax implications the best I can. Like most prudent investors, I evaluate the before/after tax implications of an investment (i.e if a taxable bond makes more sense than a municipal bond then that is my answer). Right now, for pure planning purposes, I am underwriting a static 25% effective tax rate as of day 1 of RE (this will be significantly lower the first 5 yrs). My guess is short of keeping my business running (business expenses), buying easements, or reshuffling my investments, I sort of have what I have. Anyone employ any strategies that have helped them further reduce their tax burden? How did you manage potential tax hit from RMDs?

 

[pjigar]

I maintain heavy RE portfolio in hope to achieve lower tax bracket pre-RMD age in order to avoid RMD all together. We will see how my theory holds after I stop earned income.

 

[donheff]

With a Federal pension, DWs pension and SS, and DWs substantial IRAs we use 25% as a planning figure. I hit RMDs next year and DW hits them 4 years later. In the meantime we pull exclusively from taxable equity accounts. When DWs RMDs start our taxes will go up. I am not inclined to pursue any complicated tax avoidance strategies. Too much risk of backfire.

 

[calmloki]

We are burdened with rental real estate that throws off more than we spend. Our property contracts and loans do the same, and then there is the money in the market, which Morningstar claims has done/is doing right well. Now and again we think of selling the rentals, but that will result in a big tax bill as everything is about depreciated out. I view with envy the members who machinate their income and withdrawals in such a manner that they legally avoid taxes and maximise government benefits but can't figure a way to join them. So it goes. We just keep making those quarterly tax payments - someone has to do it!

 

[audreyh1]

Most of our income gets long-term capital gains tax treatment. If we have another big bear market I can always do some tax-loss harvesting to reduce taxable income. Other than that - no fancy schemes. We only have 14% of our retirement funds in IRAs and so will probably just take the tax hit when RMDs are required.

 

[brucethebroker]

We are burdened with rental real estate that throws off more than we spend. Our property contracts and loans do the same, and then there is the money in the market, which Morningstar claims has done/is doing right well. Now and again we think of selling the rentals, but that will result in a big tax bill as everything is about depreciated out.

Have you considered 1031 exchange into a non-rental type property: say farmland or timberland? It is my understanding that both of those meet the exchange guidelines. Much, much less management, and cash flow, but it may be worth it to play the appreciation angle. Obviously, see a CPA for details.