No More Hustleporn: I used to think the tax incentives in real estate were unparalleled

By Yiren Lu — Jun 22, 2023

Tweet by Ankur Nagpal
https://twitter.com/ankurnagpal

@ankurnagpal:

I used to think the tax incentives in real estate were unparalleled

But my mind was just blown after learning about the economics of investing in solar projects 🤯

Probably the best tax saver out there for anyone with a high W-2 or business owner income

Here's how it works:

@ankurnagpal:

Warning: This is a fairly complicated tax strategy

And likely not worth it unless you're at high 6 figures+ in income

But if you are, this can offset hundreds of thousands of dollars in business profits or W-2 income

And earn you a nice income stream on the side

@ankurnagpal:

Biden's Inflation Reduction Act (IRA) in 2022 made a massive investment in climate

The act called for $369B in tax incentives for investment in green energy

These incentives are available to everyone

& particularly attractive for high earners who can offset large tax bills

@ankurnagpal:

When you invest in a commercial solar project, you get 3 big benefits:

- A federal tax credit

- Depreciation on the project that can reduce income to offset federal + state taxes

- Income from the solar project (roughly 5% of investment value)

Let's go through an example:

@ankurnagpal:

If I invest $1M in a commercial solar project:

Most commercial solar projects today have an immediate 40% tax credit

That's $400K in tax credits right there

Tax credits directly reduce your tax bill (not your taxable income) so are insanely valuable

$400K less in taxes

@ankurnagpal:

Tax credits have so many benefits:

- You can claim them for taxes already paid for the last 3 years

- They can be carried over for 20 years if you don't use them

- You can sell tax credits: they trade for ~90 cents on the $

The tax credit percentage will also increase soon!

@ankurnagpal:

On to the second benefit, depreciation

Depreciation is the amount of value that a physical asset loses over time

This provides a tax benefit as you can use this as a deduction & reduce your taxable income by this amount

Commercial solar has very attractive depreciation!

@ankurnagpal:

For federal taxes, you can depreciate the entire value minus half the tax credit over 5 years

So in the example above, you can depreciate 80% over 5 years

And via bonus depreciation, depreciate 80% in the first year

So that'd reduce your taxable income by $640,000 in Year 1!

@ankurnagpal:

Bonus depreciation allows you to front-load the depreciation & take more of it in Year 1

Without it, you'd depreciate the value evenly over 5 years

But bonus depreciation at 80% lets you claim 80% of the value Year 1, and the rest over subsequent years

Big upfront cash savings

@ankurnagpal:

If you live in a state with taxes:

For state taxes, you can depreciate the entire value over 5 years

Some states also follow bonus depreciation

In a high income tax state like New York, you could end up with $100K+ in lifetime state tax savings on the $1M project over 5 years

@ankurnagpal:

And now, the third benefit - an income stream

Most commercial solar projects under the IRA include 20 year income streams

This is tied to the solar energy produced by the project & around ~5% of the investment

So it'd pay another $50K a year for the lifetime of the project

@ankurnagpal:

Let's bring it all together

Your $1M investment in the solar project gets:

- A $400K federal tax credit

- ~$640K of federal depreciation Year 1 or $300K in tax savings at top bracket

- ~$800K of state depreciation or $100K+ in tax savings in NY

- $50K in income every year!

@ankurnagpal:

That is INSANE

And if you were so inclined, you could apply leverage here as well

(Look up a flip partnership)

You can use the 5% income stream to finance debt to add leverage to the project

This would actually save much more in taxes than what you spend

Mind blowing 🤯

@ankurnagpal:

Caveat #1:

To qualify for the tax credit, you have to be an "active investor"

This means between you & your spouse you have to spend 100 hours a year or 8 hours a month on the project

But lots of ways to qualify - touring the site, conferences, events, meetups etc.

@ankurnagpal:

Caveat #2:

If you have high W-2 income, depreciation is capped at $289K / year single or $578K / couple

But you can apply the excess amount in future tax years

But if you are a business owner, there is no limit at all to the amount of depreciation you can apply

Wild

@ankurnagpal:

OK, I'll stop here - this thread has gotten complicated enough

But after @ManiMahadevan explained this to me, it blew my mind & I wanted to share it with other business owners

If y'all are interested / want more, we can host a workshop going through this on a live call!

@ankurnagpal:

OK, we finally have a date and time for the workshop

Two weeks from tomorrow, Thursday June 29th at 2PM ET

It's totally free to attend & we'll send a replay to everyone on the list

streamyard.com/watch/MhZzCZKC…

Let me know if there are specifics we should cover