Where Strategy Drives Approval: Efficiency is Profit #
Disclaimer: DSCRIQ does not provide tax advice. The following strategies are powerful tools used by real estate investors and should be implemented with a qualified CPA.
In real estate, it’s not about what you make; it’s about what you keep. Because DSCR loans are business-purpose loans, they unlock powerful tax advantages that personal homeowners cannot access.
1. The “Power Combo”: 1031 Exchange + Cost Segregation #
This is the gold standard for high-net-worth investors to legally minimize tax liability while scaling.
Step A: The 1031 Exchange (Defer) #
When you sell a highly appreciated property, you would normally pay 15-20% in Capital Gains Tax.
- The Strategy: Use a Section 1031 Exchange to roll 100% of the profit into a “Like-Kind” replacement property (e.g., selling one small home to buy a larger one or a duplex).
- The Result: You pay $0 in taxes at the time of sale, keeping your full capital working for you.
Step B: Cost Segregation (Depreciate) #
You have now acquired a new, more expensive property via the 1031 Exchange. Now, you perform a Cost Segregation Study.
- The Concept: Instead of depreciating the building slowly over 27.5 years, an engineer identifies assets inside the building (flooring, lighting, cabinets, fencing) that can be depreciated on a 5, 7, or 15-year schedule.
- Bonus Depreciation: Current tax laws often allow you to take a massive percentage of this “accelerated depreciation” in Year 1.
- The Result: You create a massive “paper loss” that can offset your rental income, often resulting in near-zero taxable income for the year, despite positive cash flow.
2. Interest Deductibility #
Because DSCR loans are commercial/business products, the interest you pay is a 100% deductible business expense.
- Higher Rates, Lower Tax Bill: While DSCR rates are higher than conventional rates, the increased interest deduction reduces your taxable Net Income.
3. The LLC Advantage #
DSCR lenders almost always prefer (or require) you to close in an LLC.
- Pass-Through Entity: An LLC avoids “double taxation.” Profits flow directly to your personal return, where they are treated as passive income, which is not subject to FICA (Social Security/Medicare) taxes in most scenarios.
- Expense Write-offs: Holding properties in an LLC solidifies the legitimacy of deducting travel, home office, education, and software expenses related to your real estate business.
