Changing your relationship status from being single to married has additional benefits besides being with the one you love. This includes going on a journey in life together, dealing with your in-laws, adopting the family name of your husband as well as a change in tax filing which could mean some tax savings!
Once you get married, you will have an option for tax filing if you want to do it together or separately. Once you decide to file jointly, you are affected by your spouse’s income, tax credits, and deductions (e.g. from real estate).
However, if you prefer to file separately you cannot declare the standard deduction and you cannot take tax credits (like a child and dependent care credit).
Benefits of Filing Jointly as a Married Couple
Lower Tax Bracket
This has been a problem for some married couples before due to the marriage penalty. The marriage penalty used to happen when both earn almost similar salaries if combined, which drives their tax bracket to a higher level compared to when they were single. Luckily, Congress took action and reduced the penalty. If the spouses have significantly different salaries, the one who has a lower salary can pull down the other (with a higher salary) into a lower bracket. Thus reducing their overall taxes. Off the top of my head, this helps those single pilots who are plentiful in our investor club who make a great salary but are getting killed with taxes.
Securing the Estate
When you are married, you have the advantage to protect the assets of your spouse when they leave behind. Because under Federal Tax Laws, you can leave an amount of money to your spouse without the need to pay an estate tax. This privilege can protect the deceased’s estate from taxation.
Is your spouse still skeptic about real estate investing?
This especially applies to the wealthy since for them time is gold. Of course, it will save a bunch of time in accomplishing the paperwork when filed jointly.
Implementing Real Estate Professional Status
If you are able to implement a Real Estate Professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (i.e. two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals – all of which have some risks.
1) There is ordinary/W2/active income on one side. Let’s call that the 😔 side.
2) And there is the ☺️ side! Coming from passive income (syndications, passive partnerships i.e. medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications).
You can use passive losses to neutralize/eliminate passive income. That’s the good side and why passive losses are called PALs too (Passive Activity Losses).
There is a barrier between 1) Active Income and 2) Passive Income above.
You cannot offset passive losses (PALs) for active income UNLESS you are a real estate professional for tax designation purposes and able to create a “grouping/active participation”.
We work with our FOOM folks to help them craft their individual plans if REP status is possible for them.
It’s frustrating because most people:
a) Don’t stick with this and try to learn it. (Trust me it’s easier than first year college physics) It will take a few times before you get it as well as after networking with real people doing this
b) Say it’s risky and listen to their lazy/ignorant CPA. Who by the way has been stuck in they same occupation for 20-30 years.
Why would you want to take financial advice from someone who is not financially free? If you come to our Bubble/Masterminds or meet a few sophisticated investors in our community you would likely fire your current tax professional.
When a deal is successful and sold (full cycle) what happens then?
All investors will have to pay back the depreciation recapture (losses taken throughout the hold) and capital gain (the big payout on the end which is sale minus cost basis).
But don’t despair because although this is the case when you look at it myopically, in reality most investors go into multiple deals accumulating 100s of thousands of passive activity losses in their first few years investing. Those losses do not go away, but they become suspended to be used to offset future passive income and sales/capital events like this in the future.
When you exit a deal, what normally ends up happening (like Tom Brady keep winning more Super Bowls) is that you go into two more deals (with now double the amount of capital) and you will likely find that with those new K1s you could result in you having way more passive losses you began with.
If you can see where this is going… Yes, experienced investors with a lot of capital deployed might have 500k-1M+ suspended passive losses and have not paid taxes in years and do not appear to pay taxes for years!
Note: You can find how much suspended passive losses you currently have on your IRS Form 8582 – which your CPA is likely not giving to you and in that case you should get a new one.
This can cause problems since federal student loans are on an income-driven plan which means the amount that you pay for your loan (each month) is based on your salary. If this is the case then it is better to file it separately.
Unsure with your Spouse
If for any reason you are having doubts or trust issues with your spouse then it is better to file separately to avoid being liable with your spouse’s taxes on their income. This will benefit you if you’re considering divorce in the future.
- When investing with a spouse, it’s important to have a plan when managing finances and investing.
- Every couple is different.
- Discuss different strategies on how to talk finances with your significant other.
- Recap of Breakouts.
Very ImportantCommunicate with your spouse.
In essence, proceed with the tax filing process where you would benefit most. Also, seek expert advice (from CPA) which is the key to understanding the whole process and you can maximize your tax benefits.