The Three Tax Buckets

One of the biggest eroders of wealth is taxes. Many people tie themselves in knots trying to reduce, eliminate and avoid taxes.  Others are careful not to let the tax tail wag the dog. The tax code is written to incentivize investments in different areas of the economy, and passive investment in real estate receives a great number of these tax advantages.  Conventional financial opinion would put most of your tax burden into Bucket One and Bucket Two.  Passive investors looking to reduce their tax burden prefer to maximize their investments to be taxed in Bucket Three.  We will cover all three buckets below.

Bucket One – Active Ordinary Income

Most passive investors have a W-2 income that they receive for exchanging their time for money – i.e. they have a job that pays a salary.  That salary is often taxed at the state and local level, but is always taxed at the federal level.  For the purpose of this discussion, we will focus on federal taxes. This is tax Bucket One – Active Ordinary Income.  This is money that you earn, either on a W-2 or a 1099, actively working at your job.  This income is taxed at the highest marginal rate.  The more you make, the higher your tax rate.  

The way Bucket One is taxed is one of the reasons the 401k is so popular because, as conventional wisdom says (i.e. what the financial industry wants you to think and do) – you should max out your 401k in order to lower your current taxable income.  That’s a great idea if tax rates are high now and will be lower for you in retirement, but what many people don’t understand is that taxes may not be lower when you retire.

Left Fielders use Bucket One income to purchase assets that produce income in Bucket Three in order to reduce their overall tax burden as well as to replace their W-2 income with true passive income.

Bucket Two – Portfolio Income

Many passive investors, especially when they are first starting on the passive investing journey, also have money in the “market”.  This could be stocks, bonds, mutual funds and other assets from which you collect interest, dividends and capital gains.  This is often taxed at a rate lower than Bucket One and is often thought of as passive – i.e. you are not actively engaged in earning this income.  This is where it gets confusing because although this bucket is technically “passive income”, it is not the type of passive income that the tax code treats most favorably. Losses from Bucket Two, usually in the form of losses on stock and mutual fund sales, can be used to offset gains – but only gains from Bucket Two.

Left Fielders often divest from many of their Bucket Two assets in order to buy assets that will be taxed in Bucket Three.

Bucket Three – Passive Income

This bucket is the most advantageous from a tax perspective and deals with passive investments in real estate, typically rental real estate, capital gains from the sale of real estate and passive syndications.  This bucket allows any loss, including depreciation, to be offset by any gains in the bucket.  If the losses exceed the gains, then the losses can be carried forward indefinitely to offset gains in the future.  The gains (and losses) can come from the sale of a property or syndication or the cash flow from a property or syndication.

The tax law passed in 2017 enhanced this bucket with the concept of bonus depreciation and cost segregation.  Usually when a syndicator purchases a new property, they do a cost segregation which basically separates real property from personal property and allows the purchaser to depreciate different parts of the property on an accelerated schedule.  Bonus depreciation allows the purchaser to accelerate the schedule even further by allocating a large chunk of the depreciation to year one.

The effect of this for passive investors is a large paper loss in year one of the investment that usually far exceeds the cash flow gain in the first year.  For example, if you invested $50,000 in a syndication, it is not uncommon for the syndicator to deliver 70% of your investment as a paper loss in year one (using cost segregation and bonus depreciation), so that would be a $35,000 loss in Bucket Three.  If you received a 10% cash-on-cash return in year one, you would have received $5000 in cash flow from the investment.  You would be left with a $30,000 loss you can use to offset any other gains in Bucket Three.  As always, there is a downside – when the asset is sold, you must recapture the depreciation and pay tax on the amount recaptured.  In effect, the benefit of the depreciation is to defer tax on the depreciated amount.  However, if you invest in a new syndication in the same tax year as the sale of the previous syndication, your new depreciation can offset the depreciation recapture of the sold asset.  This is what some investors call the “Golden Hamster Wheel” – you continue buying new syndications in order to continue deferring taxes. 

The depreciation strategy can also be used as a “Lazy 1031”.  A 1031 Exchange is where you sell one property and defer the capital gains tax if you use those funds (within a certain time frame and under specified conditions) to buy a new, similar asset of greater value.  If done properly, the capital gains tax is deferred.  1031 Exchanges can be complicated and force you to buy a larger asset when that might not be the best use of your sale proceeds.  The “Lazy 1031” is where you sell a property and use the proceeds to invest in passive syndications that will produce paper losses that can offset the capital gains.

Left Fielders seek to have a significant portion of their assets and income in Bucket Three which can result in a significantly lower overall tax rate than they had when they were conventional investors (Right Fielders).

Passive investing brings tax benefits and understanding the different buckets is extremely important.  However, as with all tax situations, it can get complicated so be sure to seek advice from your financial adviser and CPA to translate the advantages to your particular situation.  

Jim Pfeifer is one of the founders of Left Field Investors.  He is a full time investor living in Dublin, OH.  He has invested in over 30 passive syndications in his quest to become financially free through the acquisition of real assets that produce real cash flow.  You can connect with him at

Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.

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Jim Pfeifer

President, Chief Executive Officer, Founder

Jim Pfeifer is one of the founders of Left Field Investors and the host of the Passive Investing from Left Field podcast. Left Field Investors is a group dedicated to educating and assisting like-minded investors negotiate the nuances of the passive investing landscape and world of syndications. Jim is a former financial advisor who became frustrated with the one-path-fits-all approach of the standard financial services industry. Jim now concentrates on investing in real assets that produce cash flow and is committed to sharing his knowledge with others who are interested in learning a different way to grow wealth.

Jim not only advises and helps people get started in passive real estate syndications, he also invests alongside them in small groups to allow for diversification among multiple investments and syndication sponsors. Jim believes the most important factor in a successful syndication is finding a sponsor that he knows, likes and trusts.

He has invested in over 100 passive syndications including apartments, mobile homes, self-storage, private lending and notes, ATM’s, commercial and industrial triple net leases, assisted living facilities and international coffee farms and cacao producers. Jim is constantly looking for new investment ideas that match his philosophy of real assets producing cash flow as well as looking for new sponsors with whom he can build quality, long-term relationships. Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.

Jim earned a degree in Finance & Marketing from the University of Oregon and a Master’s in Business Education from The Ohio State University. He has worked as a reinsurance underwriter, high school finance teacher, financial advisor and now works exclusively as a full-time passive investor. Jim lives in Dublin, Ohio with his wife, three kids and two dogs. In his free time, he loves to ski, play Ultimate frisbee and cheer on the Buckeyes.

Chad Ackerman

Chief Operating Officer, Founder

Chad is the Founder & Chief Operating Officer of Left Field Investors and the host of the LFI Spotlight podcast. Chad was in banking most of his career with a focus on data analytics, but in March of 2023 he left his W2 to become LFI’s second full time employee.

Chad always had a passion for real estate, so his analytics skills translated well into the deal analyzer side of the business. Through his training, education and networking Chad was able to align his passive investing to compliment his involvement with LFI while allowing him to grow his wealth and take steps towards financial freedom. He has appreciated the help he’s received from others along his journey which is why he is excited to host the LFI Spotlight podcast and share the experience of other investors and industry experts to assist those that are looking for education for their own journey.

Chad has a Bachelor’s Degree in Business with a Minor in Real Estate from the University of Cincinnati. He is working to educate his two teenagers in the passive investing world. In his spare time he likes to golf, kayak, and check out the local brewery scene.

Ryan Steig

Chief Financial Officer, Founder

Ryan Stieg started down the path of passive investing like many of us did, after he picked up a little purple book called Rich Dad, Poor Dad. The problem was that he did that in college and didn’t take action to start investing passively until many years later when that itch to invest passively crept back up.

Ryan became an accidental landlord after moving from Phoenix back to Montana in 2007, a rental he kept until 2016 when he started investing more intentionally. Since 2016, Ryan has focused (or should we say lack thereof) on all different kinds of investing, always returning to real estate and business as his mainstay. Ryan has a small portfolio of one-to-three-unit rentals across four different markets in the US. He has also invested in over fifty real estate syndication investments individually or with an investment group or tribe. Working to diversify in multiple asset classes, Ryan invests in multi-family, note funds, NNN industrial, retail, office, self-storage, online businesses, start-ups, and several other asset classes that further cement his self-diagnosis of “shiny object syndrome”.

However, with all of those reaches over the years, Ryan still believes in the long-term success and tenets of passive, cash-flow-focused investing with proven syndicators and shared knowledge in investing.

When he’s not working with LFI or on his personal passive investments, he recently opened a new Club Pilates franchise studio after an insurance career. Outside of that, he can be found with his wife watching whatever sport one of their two boys is involved in during that particular season.

Steve Suh

Chief Content Officer, Founder

Steve Suh, one of the founders of Left Field Investors and its Chief Content Officer, has been involved with real estate and alternative assets since 2005. Like many, he saw his net worth plummet during the two major stock market crashes in the early 2000s. Since then, he vowed to find other ways to invest his money. Reading Rich Dad, Poor Dad gave Steve the impetus to learn about real estate investing. He first became a landlord after purchasing his office condo. He then invested passively as a limited partner in oil and gas drilling syndications but quickly learned the importance of scrutinizing sponsors when he stopped getting returns after only a few months. Steve came back to real estate by buying a few small residential rentals. Seeing that this was not easily scalable, he searched for alternative ideas. After listening to hundreds of podcasts and attending numerous real estate investing meetings, he determined that passively investing in real estate syndications was the best avenue to get great, risk-adjusted returns. He has invested in dozens of syndications involving apartment buildings, self-storage facilities, resort properties, ATMs, Bitcoin mining funds, car washes, a coffee farm, and even a Broadway show.

When Steve is not vetting commercial real estate syndications in the evenings, he is stomping out eye diseases and improving vision during the day as an ophthalmologist. He enjoys playing in his tennis and pickleball leagues and rooting for his Buckeyes and Steelers football teams. In the past several years, he took up running and has completed three full marathons, including the New York City Marathon. He is always on a quest to find great pizza, BBQ brisket, and bourbon. He enjoys traveling with his wife and their three adult kids. They usually go on a medical mission trip once a year to southern Mexico to provide eye surgeries and glasses to the residents. Steve has enjoyed being a part of Left Field Investors to help others learn about the merits of passive, real asset investments.

Sean Donnelly

Chief Culture Officer, Founder

Sean holds a W2 job in the finance sector and began his real estate investing journey shortly after earning his MBA. Unfortunately, it could not have begun at a worse time … anyone remember 2007 … but even the recession provided worthy lessons. Sean stayed in the game continuing to find his place, progressing from flipping to owning single and multi-family rentals to now funding opportunities through syndications. While Sean is still heavily invested in the equities market and holds a small portfolio of rentals, he strongly believes passive investing is the best way to offset the cyclical nature of traditional investment vehicles as well as avoid the headaches of direct property ownership. Through consistent cash flow, long term yield and available tax benefits, the diversification offered with passive investing brings a welcomed balance to an otherwise turbulent investing scheme. What Sean likes most about the syndication space is that the investment opportunities are not “one size fits all” and the community of investors genuinely want to help.

He earned a B.S. in Finance from Iowa State University in 1995 and a MBA from Otterbein University in 2007. Sean has lived in eight states but has called Ohio home for the last 20+.  When not attending his children’s various school/sporting events, Sean can be found running, golfing, shooting or fly-fishing.

Patrick Wills

Chief Information Officer, Advisory Partner

An active real estate investor since 2017, Patrick Wills’ investing journey began like many others – after reading the “purple book” by Robert Kiyosaki. Patrick started with single family rentals, and while they performed well, he quickly realized their inability to scale efficiently while remaining passive. He discovered syndications via podcasts and local meetups and never looked back. He joined Left Field Investors in 2022 as a member and has quickly become an integral part of the team as Vice President of Technology.

An I.T. Systems Engineer by trade, he experienced the limitations of traditional Wall Street investing firsthand in his career and knew there had to be a better way to truly have financial freedom.

Unfortunately, that better way is inaccessible to those who need it most. His mission is to make alternative investments accessible to everyone who seeks to take control of their financial future and to pursue their passions in life.

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