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July 9, 2024
Last Updated : July 9, 2024

BRRRR: The Ultimate Tax Smart Real Estate Investing Strategy

Are you eager to dive into the world of real estate investing but feeling overwhelmed by the multitude of strategies available?

Allow us to introduce you to one of the most tax-savvy methods in the field: Buy, Rehab, Rent, Refinance, Repeat (BRRRR).

Whether you’re a novice investor or a seasoned professional, BRRRR can significantly accelerate your wealth-building journey, while also offering the substantial tax benefits of investment property.

The Basics of Buy, Rehab, Rent, Refinance, Repeat (BRRRR)

The BRRRR strategy revolves around acquiring properties in need of a little TLC and boosting their market value through strategic renovations—a process often referred to as “forcing appreciation.”

Reap the Tax Benefits of Investment Property

The process is as follows:

  1. Buy: Purchase a property, typically one that’s undervalued and requires some work.
  2. Rehab: Renovate the property to increase its value.
  3. Rent: Find a tenant to start generating rental income.
  4. Refinance: Refinance the property to pull out your equity—tax-free.
  5. Repeat: Use the cash from refinancing to buy another property and start the cycle again.

Why BRRRR is Tax Smart

Let’s break it down with a simple example. Suppose you snag a fixer-upper for $200,000 and, through renovations, boost its value to $350,000.

You’ve effectively increased your equity by $150,000. Then, you refinance with a 75% loan-to-value (LTV) ratio, pulling out $112,500 in equity.

Key Tax Principle: Loan proceeds aren’t taxable. That’s right—cash-out refinances are tax-free, meaning you can leverage your property’s equity without selling and triggering capital gains tax.

The Tax Impact of Selling vs. Refinancing

Imagine if, instead of refinancing, you sold the property. If the sale happens within a year, it’s typically considered a “flip,” taxed at ordinary income rates up to 37%, plus state and local taxes, and an additional 15.3% in self-employment taxes if applicable.

In a state like Florida with no income tax, your total tax rate could hit 52.3%, slashing your $112,500 profit to just $53,663. Ouch!

Even with long-term capital gains (LTCG) treatment, assuming a 15% LTCG rate and no net investment income tax (NIIT), you’d still be paying $16,875 in taxes.

Wealth-Building with BRRRR

Not only does BRRRR save you real estate investment taxes, but it also boosts your return on equity (ROE).

While many investors focus on cash-on-cash return (CoC), which measures performance relative to the cash invested, it overlooks the growing equity in your property.

As your property appreciates and you pay down the mortgage, your equity increases. A cash-out refinance lets you put that idle equity to work.

Practical Example: Realizing the Tax Benefits of BRRRR

Consider this: You buy a rundown property for $200,000, spend $50,000 on renovations, and raise its value to $350,000. Renting it out brings steady income, and refinancing at 75% LTV gets you $112,500 tax-free. You can then reinvest this into another property, repeating the process and expanding your portfolio without ever selling and incurring hefty taxes.

BRRRR Beyond Real Estate

Did you know that the BRRRR strategy’s principles aren’t confined to real estate?

Big-time investors, like Elon Musk, leverage similar tactics with their stock holdings. Musk famously tapped into his equity to buy Twitter without selling his stock, thus avoiding capital gains taxes.

Final Thoughts on BRRRR

The BRRRR strategy is a cornerstone for Tax Smart Investors. By allowing you to build your real estate portfolio using property equity without selling, you can dodge capital gains taxes and keep your wealth growing.

Plus, when loan proceeds are used for business purposes, such as further renovations or down payments on new properties, the interest is generally tax-deductible.

Stay tuned because there are even more tax-smart methods for tapping into property equity, like the 1031 exchange, which we’ll cover in future articles.

Ready to take your investing game to the next level? Contact us today.