If My Income Phases Me Out of Real Estate Tax Benefits, Should I Stunt My Growth Plans?

by | BiggerPockets.com

On one of my recent “new client consultations,” I had a real estate investor ask a great question. Rephrased a bit, his question was: “If my income phases me out of being able to capitalize on all of the great tax benefits real estate has to offer, should I scale a portfolio quickly using creative financing or just focus on slow and steady growth by purchasing all cash?”
This guy has thought through his situation, and even better, he has familiarity with how his income affects his ability to take passive losses from his rentals!
I’m going to cover the tax side of the issue today and talk about what I’d do and what my many clients in this situation do. However, I think this question comes up short, as it seems to focus purely on taxes rather than risk tolerance.
You see, taxes are only one (small) part of the equation. In this case, leverage would be needed to quickly scale a portfolio. Yes, the larger the portfolio, the larger the tax benefits, but the point is that leverage must generally be used.
So the root question should really be, “Am I OK with the additional risk brought on by the use of leverage?” If you don’t have a high degree of risk tolerance—rather, you’re risk averse—then forget about the tax issues and just ask yourself whether you are using the right amount of leverage!
Anyway, back to taxes. It’s true that if your income is above $150,000, you may be phased out of taking passive losses from your real estate activities. Should that fact alone stunt your growth plans? Let’s find out.

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Explaining EBDA

When you invest in rentals—and especially in today’s market—the rentals may produce a passive loss for tax purposes. The key to the previous phrase is “for tax purposes.”
You see, your rentals produce hard expenses, such as property management, legal, accounting, repairs, maintenance, and interest expenses (remember, the principal balance of your loan payment is NOT deductible). When you subtract these expenses from your rental income, you get something called EBDA (Earnings Before Depreciation and Amortization).
Your EBDA, also Net Operating Income, is what actually hits your pocket. Consider it similar to your cash flow. The difference between EBDA and cash flow is that EBDA doesn’t account for principal and escrow payments to your lender. This factor makes it a true indicator of your property’s performance.
Notice that EBDA is “before depreciation and amortization,” so naturally, our next step is to subtract soft expenses such as depreciation and amortization. I call these “soft” expenses because these expenses do not require the continual outlay of capital to claim the expense. Instead, soft expenses are essentially a credit to help offset the large outlay incurred when you purchased the property.
After subtracting depreciation and amortization, we are often thrown into negative earnings territory. This is where it can get confusing from both an operating and tax perspective.
From an operating perspective, you may think you lost money. But this isn’t the case because your EBDA can easily be positive, and your EBDA is what is actually hitting your pocket. Yet on your tax return, you’ll see a negative number. How is this so? Because again, depreciation and amortization are soft expenses. They are a direct result of the price you paid for the property when you bought it. So even though you have a taxable loss from your rental, you will want to add back depreciation and amortization to see a true reflection of your property performance.
You must be able to articulate this fact to potential buyers, investors, and sometimes lenders. EBDA is the true operating results of the property, not what you see on your tax return.
When your rentals generate passive losses, there are a whole slew of tax rules that you must now pay attention to. That’s what we’ll dive into next.

Explaining Passive Losses

When your rentals produce a passive loss, as indicated by your tax return, you may or may not be able to utilize your passive losses when calculating your annual tax bill. The key is to understand how your income levels phase you out of the ability to utilize passive losses.
Now, when I say “income,” I really mean your modified adjusted gross income. But I’m trying to keep it simple, and I want to avoid frying your brain.
If your income is below $100,000, you can use up to $25,000 of passive losses annually. As an example, if you have $25,000 of passive losses and your income is $100,000, you will only be required to pay taxes on $75,000 of income. Yet the real estate producing the passive losses could actually have a positive EBDA! So you can have an asset producing income that isn’t taxed due to depreciation and amortization offsets, and the passive losses can further be applied to your ordinary income. That’s the power of real estate investing.
As your income increases above and beyond $100,000, the passive losses you are allowed to claim will begin to decrease. You will be completely phased out of taking passive losses once your income hits $150,000.
This can be a painful realization for many people.
In my experience, many of the people investing in rental property have incomes above $150,000. This makes sense, as rental real estate is quite expensive to acquire. You must generally have solid income to qualify for a purchase. I say “generally” because there are people who buck the trend and creatively acquire real estate. More power to you!
So anyway, you have all of these investors with incomes above $150,000 who have been told that real estate will make their tax positions much better. They drink the Kool Aid and then get upset when they realize they can’t utilize the tax benefits their new investment was supposed to grant them. Then they call me because they don’t understand what’s going on, and I have to give them the “real” scoop. Here’s what I tell them.

Your Passive Losses Will Be Suspended

When you can’t use your passive losses, they become “suspended.” This means that you don’t lose them, you just can’t use them today. Instead, the passive losses will be carried forward until they can be used to offset passive income or gains from a sale of a property.
This is what upsets many of the higher net earners who thought real estate was going to save their tax situation. If you have been expecting awesome tax benefits but realize at tax time that you can’t utilize passive losses, and instead they just kind of sit there and accumulate, you may be bummed out. Working with a good CPA is key here, as you’ll put a plan together to tap into your suspended passive losses and earn tax-free income!
If you want to see whether or not you are carrying forward passive losses, check out Form 8582 which should be included in your tax return package. If it’s not included, you don’t have passive losses.

You Can Still Tap into Passive Losses

I wrote an article a couple of weeks ago about strategies you can use to tap into your suspended passive losses. Basically, when you incur real estate losses that you cannot take, you don’t want to let them simply accumulate. That accumulation of passive losses is costing you today’s dollars, mainly in the form of tax savings. We want to figure out how we can tap into suspended losses in order to earn tax-free income.
For instance, if your income is above $150,000, your passive losses generated from your rentals will be suspended and carried forward. Let’s assume you are carrying forward $10,000 in suspended passive losses. If you can figure out how to activate those passive losses, you can earn up to $10,000 tax-free because the suspended losses will offset the income. A strategy to tap into $10,000 of suspended passive losses is worth $2,800 of tax savings if you’re in the 28% tax bracket.
In my article, I detailed strategies we can use to do this. Such strategies consisted of buying better cash-flowing rentals, selling property, and taking a passive ownership stake in a business (not a C-Corp!).
Another strategy that I did not cover is qualifying your non-working spouse, if applicable, as a real estate professional. Doing so will not enable you to tap into previously suspended passive losses, but you’ll be able to claim all future passive losses regardless of your earnings level. In this case, we “stop the bleeding” as some of my clients like to put it.
The main point that I am trying to demonstrate is that while your income may phase you out of being able to currently deduct passive losses, you shouldn’t simply give up. You should connect with a solid CPA and develop a game plan for activating prior suspended passive losses and utilizing all future passive losses.

Related: 7 Myths About the Real Estate Professional Tax Status, Debunked

Your Effective Tax Rate Will Decrease as You Scale

Even if you can’t take passive losses due to your high income levels, you will still reap the tax benefits of investment real estate. This is a fact that is relatively difficult to drill into a new client’s head, but it’s very important to understand.
Think about it like this: If you earn $150,000 and pay $30,000 in taxes, your effective tax rate is 20%. Now let’s say your buy rental property that cash flows $300 per month and produces a depreciation write-off of $400 per month. In this scenario, you have a $100 passive loss ($300-$400) per month or a $1,200 passive loss annually. You will be unable to claim this passive loss due to your income level. But the question is, have you lost all of the tax benefits associated with your rental?
The answer, of course, is a resounding NO! In this case, we have an additional $300 per month or $3,600 per year in tax-free income. It’s tax-free because the depreciation write-off is producing a passive loss. Yet it’s not actually a loss from an EBDA perspective because our rental income exceeds our operating expenses.
Now, our total earnings are $153,600, but we are still paying the same $30,000 in taxes. Our effective tax rate has decreased from 20% to 19.5%. That’s an excellent demonstration of how real estate helps your tax position, even if you are a high earner.
And it only gets better once your quit your day job. Maybe that’s not your goal and you are going to stick it out until retirement. Fine. But regardless, once your quit, your portfolio of rental properties will be producing tax-free income—or close to it. Have you ever seen someone pocket $100k per year tax-free? I have. It’s a very real scenario that you should consider striving toward as you scale your portfolio.

Answer: Continue to Scale Your Portfolio, But Be Smart About It

To sum up my very long-winded answer, you should continue to scale your portfolio even if you are a high income earner. Regardless of earnings, real estate will most usually help your tax position. While your passive losses may become suspended, there are always ways to tap into them and activate them. Additionally, income from rental real estate decreases your effective tax rate, which is what we should all be striving for.
My clients, and other investors I’m close with, utilize leverage to acquire real estate to build their passive income. They understand that, while leverage is risky, the tax benefits compound as a portfolio expands. While I don’t want to advocate one way or the other, and you should think long and hard about your own asset allocation and potential purchases, utilizing leverage does grant us the ability to scale our passive income, wealth, and corresponding tax benefits much more quickly than purchasing assets all cash.
The key is to be smart. The market is hot, and deals are hard to come by. There is no point in investing in an asset simply to lose money. And by that, I mean actually lose money, not just providing a passive loss. Unless, of course, you are investing for appreciation purposes which I’m not a fan of.
Cash is king, and cash flow is queen. The great thing about rental real estate is that your cash flow can be tax-free regardless of your income level and corresponding tax bracket.
Disclaimer: This article does not constitute legal advice. As always, consult your CPA or accountant before implementing any tax strategies to ensure that these methods fit with your particular situation.
[Editor’s Note: We are republishing this article to help out our newer readers.]
Investors: How do you scale while continuing to take advantage of real estate’s tax benefits?
Let me know your thoughts with a comment.

About Author

Brandon Hall

Brandon Hall is a CPA and owner of The Real Estate CPA. Brandon assists investors with Tax Strategy through customized planning and Virtual Workshops. Brandon is an active real estate investor and a Principal at Naked Capital, a capital group investing in large multi-family projects and manufactured housing. Brandon's Big 4 and personal investing experiences allow him to provide unique advice to each of his clients.


  1. Jerry W.

    excellent article. Thanks for taking the time to share your expertise with us. I am always amazed at the difference between what the tax return says I made compared to the amount of equity I gained by paying down a mortgage.

  2. George Krischke

    Aloha Brandon,
    Thanks for another great article.
    For scaling you would want to be in the ‘qualified real estate professional’ category. That is when real estate is your ‘main’ business (investing, rehabbing, developing, etc.), and you use Sec 469 to eliminate the $25K limit and instead claim unlimited deductions!
    ‘Qualified real estate professional’ does not mean you need a real estate license.
    You must however a.) be ‘actively’ involved in real estate activity for a minimum of 750 hours per year, and b.) you must spend more hours in real estate activities on an annual basis than in any other business. For married couples filing joint tax returns, either spouse may satisfy these requirements.
    This is a huge gift horse for the ones that qualify. Make sure to keep good records on the hours spend with your real estate business.

    • Brandon Hall

      George – thanks for reading and the insightful comment! I agree that the easiest route to tap into losses is to have a spouse qualify as an RE pro. Another option – if both spouses desire to continue working in their full-time gigs, the RE pro becomes unfeasible. To remediate this, I suggest encouraging clients to find PIGs (passive income generators) which can be a family run, local, or other private business. This way, we are generated passive income that can soak up the passive losses being spawned by the real estate activities.

      • Tom V.

        Brandon, this PIG option is very interesting. Would you mind elaborating on what type of businesses would qualify as a passive income generator? My guess is it would have to be a business that you own, but are not actively involved in the operations?

        • Brandon Hall

          You need a stake in the business and it can’t be a C-Corp. I have clients that invest in family owned businesses, restaurants, other real estate operations, and other semi-established businesses.

          What you don’t want to do is invest in a brand new start up that doesn’t have a proven track record of providing passive income to investors. At least for tax purposes. If you had invested in Uber, then who the heck cares! 🙂

    • Jerome Kaidor

      I would probably qualify for the “real estate professional” category, but never claimed it. Thank goodness! Because….

      ….I just started receiving Social Security, and as someone who is not a professional, I can receive my entire SS check, all the while taking home any arbitrary amount of
      “passive income”.

    • Kurt Stresau

      I want to caution you about the rules pertaining to claiming to be a real estate professional. My caution is timely, as I am being audited for 2014, 2015, and we’ll have to refile my 2016 taxes. During the audit the IRS has disallowed my claim during 2014 and 15 of being a real estate professional.

      I maintained time and transportation logs of all of my activities pertaining to pertaining to management and and maintenance of my properties. The IRS has reviewed those records and disallowed most of those activities, stating that many of them are investor activities and not real estate professional activities.

      Do you spend an hour balancing your accounts and paying Insurance bills and mortgages? That’s an investor function and not a real estate professional function.

      Do you perform maintenance inspections of your properties? The IRS took the position that an investor is looking out for their Investments and is not performing a management function. If a professional property manager did it, of course it’s a property management function. If you do it for your own property, you’re doing it as an investor.

      Did you drive an hour to the property collect a rent check and drive an hour home? Only the five minutes that you spent at the property is recordable as a real estate professional function. Commute time is not permitted in your time log to count towards the 750 hours.

      There were a whole host of other exclusions. Did you buy a new property and spend 300 hours personally remodeling it before you put it up for rent? That time is treated as essentially a capital investment of investor time because the property was not ready for Market. That’s not real estate investment, that’s an investor function. Disallowed. Do the same work after a tenant moves in, and now it’s a real estate professional activity.

      You can always take the risk and hope the IRS does not call you on it, but please do your homework beforehand. There is a lot of stuff that the IRS will judge based on court proceedings and precedent, not what explicitly written in the tax code.

      In my case my disallowed passive losses from 2014 and 2015 will offset passive games from 2016 and theoretically 2017. I’m only going to be out maybe $1,000 in interest, with no penalty. Watch your back, this is more complex than you might have anticipated.

  3. Steven Lybeck

    Thanks @Brandon, this is a really great article! It’s nice to see some nuts and bolts stuff here on BP.

    I bought my first – let’s call it a boarding house, in that I live here and rent out rooms – about 2 years ago and so it has shown up on 1 tax return so far. Exactly as you said, I was surprised and frustrated to work up a “passive loss” on my tax return and not be able to use it to offset my self-employment income.

    A couple questions:

    – Are “suspended passive losses” treated as one account on my personal tax file so they can be used to reduce any passive gains in the future, even gains unrelated to this property?
    – In the case of a sale, would the taxable gain be calculated roughly as (sale price) – (depreciated value) – (suspended passive losses)?

    • Brandon Hall

      Steven – good questions.

      1. Yes they can reduce passive income from any source (doesn’t even have to be real estate).
      2. Sale would be sales price less adjusted basis less passive losses. Ex: sell a home for $100k with depreciation of $20k and passive losses of $5k. Your adjusted basis is $80k (due to $20k depreciation), so $100k – $80k gives you a $20k gain. Your $5k passive loss reduces your $20k gain by that amount.

  4. Emilio Esposito

    I think the touted benefit of being able to deduct real estate losses is hugely exaggerated unless you are in NYC or SF bay type of market. The only time it helps is if you are making razor thin real profits (like those markets). Otherwise you should be more worried about why you keep overpaying for properties.

    The only way to recognize a loss due to depreciation is if your implied cap rate is less than 3.6%.

    A little math to demonstrate:

    Depreciation is the cost basis (read sales price) of the building (not even the land!) evenly spread over 27.5 years. 1/27.5 = 3.63%. Say your building brings in $100K EBDA, and you bought at a 4% implied cap rate (implied sale price of $2.5M). The annual depreciation on $2.5M is $91K maximum (probably much much less because we are assuming land value of $0). $100K – $91K = $9K. Still a positive number, so the “benefit” of deducting a loss is not even used.

    • Brandon Hall

      Good points but you’re not thinking broad enough. Real estate is never as simple as your example.

      What if you’re undergoing asset repositioning and you incur large repair expenditures that put you in loss territory for the first two years? You’ve potentially added a lot of value by boosting rents but you have likely caused large passive losses.

      Another one – what if you engage in a cost segregation study and accelerate your depreciation? Now it’s not as simple as dividing the improvement value by 27.5. Instead, during the first five years you’ll incur large depreciation expenditures that will most likely put you in passive loss territory.

      Passive losses are most certainly overhyped, but generally by those who don’t understand the applicability of more complex strategies.

    • Jerome Kaidor

      I think it would be “AGI”, but I’m not an accountant. But one thing it DEFINITELY means is “Income from sources other than your real estate endeavors”. Because all the losses can be taken against your Schedule E income, regardless of how big they are, EXCEPT
      …. If some of your losses are from big projects, aka “Capital Expenses”, then you must depreciate those. So you may have real losses, that decrease your into-pocket takehome, that you are UNABLE to expense.
      ….Every year, one of the big things I have to do for taxes, is to dissect my “Maintenance & Repair” expenses to find the big projects, for example apartment turnovers, roof replacements, new appliances etc. Most of these things are depreciated over 7 years.

      Once you have a solid queue of “depreciate over 7 years” items, it kind of doesn’t matter. But it is a serious paperwork burden.

  5. Great article, thanks! Can anyone recommend a good tax accountant in the Seattle area that is well versed in this scenario? My CPA said, “that’s the way it is, live with it.” Time for a new accountant.

    • Brandon Hall

      Ah a CPA should never say “live with it!” Instead, they should be asking “how?”

      For instance, a bad CPA will tell you that your phased out of taking passive losses due to your income. A good CPA will ask “how” we can tap into those suspended losses. A stark but critical difference! Feel free to contact me.

    • Darin Anderson

      Your current CPA is correct but perhaps he should have phrased it like this: That is the way it is, live with it OR be willing to make some other non-trivial changes to meet other criteria that could let you use this passive loss.

      This isn’t actually very complicated. Other than selling your property, there are basically 3 categories of ways to do this:

      1. Become a real estate professional (large hurdle in terms of hours in real estate, either 750 hours annually for a spouse or 2000 hours annually for you if you also have a fulltime W2 or other full time job such as self employment)
      2. Reduce your income. (Either make less money [That’s not the goal is it?] or find ways to defer more of what you make for tax purposes [presumably you are already deferring as much as you can afford to but perhaps not])
      3. Increase your passive income by investing in other profitable passive income businesses or other profitable real estate investments. (Note: this one will not reduce your taxes, it will just give you more tax free income)

      Which one of those are you interested in pursuing? If the answer is none then your current CPA’s advice is what you will be following.

  6. Dave Strode

    Brandon, This is very good information and very timely for me personally. I retired this year and received a very nice severance package that I have now bought four SFR rental units using Brandon Turner’s BRRRR strategy. I have been trying to determine if it is best to put them in a LLC or not for the liability and tax benefits. I consulted with one tax specialist (not a CPA) that highly recommended that I form a LLC and that the Tax benefits would be much better for us. My lawyer says a LLC is not all its cracked up to be. I’m looking for a good CPA/Tax expert who knows REI issues to give me some guidance. Do you or anyone else in the BP community know of any in the southwest suburbs of Chicago? Thanks for sharing.

      • Kurt Stresau

        Agreed. I am in Florida with a single member LLC, filed with the IRS as a disregarded entity. Please look up that term to understand the tax nuances, but essentially it means that all of my LLC properties show up on my personal 1040 schedule E as if I own them in my own personal name. There is no tax benefit whatsoever.

        In fact, you may be causing yourself a bigger headache than you planned. If you own the properties in an LLC, you will find that you are now exclusive from conventional Residential Mortgages, since those are generally only given to individuals, not business entities. You’re now in the position of having to use commercial financing, and the rates and terms may not be as generous as a conventional Residential Mortgage. You could actually be hurting yourself in terms of increasing your carrying costs.

        You also need to discuss the issue from an estate perspective, since you indicated that you are of an age where those things are important. Currently under IRS guidelines there is a one-time Step Up in basis of a property based on the day that the owner dies. That step-up in cost basis implies that your estate will not owe taxes since it will not incur a capital gain upon sale or liquidation of the property.

        I don’t believe the same necessarily holds true if the property is held in an LLC. There could be massive tax consequences to that. You need an estate planning CPA/lawyer to clarify that. It’s been on my to-do list, and I haven’t gotten around to it yet.

  7. Chris Ayers

    I’d like to get a CPA to go over my situation with me, but I have no idea where to start when selecting one. Do I need to find one who specializes in real estate or any one will do?

    Also, how does payment work as well? Do I pay for a sit down consultation and then for any additional meetings following on?

    • Brandon Hall

      Chris – this is an excellent question. I’ve written about this particular topic previously. You really need a CPA who focuses on individuals in the real estate industry. A generalist will have little clue as to how to maximize your tax position.

      A great example of the damage a generalist can do, even when they are a CPA, comes from a commenter on this very article above (CORINE ROSADO). Her CPA said “this is the way it is, live with it” which is horrible, horrible advice.

  8. Jeff B.

    The is another great article on BP. Thanks Brandon. One of the main reasons I got into REI was for the “tax advantages”? Then after my first year (2015) I find that it passive losses phase out at $150K. I was a little upset to say the least and thought that a LLC is the way to go for me? After reading this article, I have a different view for now. I especially like the view that my passive rental income is off set by my paper losses and is basically earned tax free, decreasing my tax burden. This motivates me.

    Thanks Brandon.

    • Brandon Hall

      Jeff – I’m glad you enjoyed the article. I struggled with my high net income clients until I realized how to explain the benefits of real estate investing in this way. You may not be able to use your passive losses to the fullest extent, but your passive gains are erased and your effective tax rate decreases which is the ultimate goal!

      • Jerome Kaidor

        “…and your effective tax rate decreases which is the ultimate goal!”

        No, it isn’t. The ultimate goal is to have more money. Sometimes that involves paying tax. When I was a wage slave, I would occasionally get a raise. I *never* refused a raise because it would raise my taxes. I also never wound up with less money in my pocket after a raise.

        My RE empire makes good money. It makes enough money to overpower the depreciation and expenses, and force me to pay tax. It’s OK, I’d rather make the money. There is enough depreciation so the tax rate is low.

        I have a friend with an apartment complex in Redwood City, CA. He has had it for 40 years, and has no mortgage or depreciation. His expenses are low because he is a general contractor. I once asked him how much cash flow that thing gave him, and he said “Jerry, if I told you, you’d just be jealous”.

        Another friend has a building out on the Coast. He felt he was starting to pay too much tax. So he pulled a great big loan out of the building ( IIRC $300K ) and put the money back into the property.

        • Brandon Hall

          Of course the ultimate goal is to have more money but if your taxes incr see proportionately, you’re doing something wrong. Hence the fact that lowering your effective tax rate should be a priority.

          If you earn $200k in a W2 job and $200k in net rental income, your net rental income will be taxed at a lower effective tax rate than your W2, even though they are the same amounts.

          As you increase the size of your portfolio, you’re earning more money yet lowering your effective tax rate at the same time. This is due to the natural tax shelter real estate tends to provide.

          We’re arguing the same thing. My focus has always been growth. I’d never advocate that someone should earn less to pay less in tax as that’s ludicrous. I advocate growing smartly so that you can grow your income while paying less (effectively) in taxes. So I’m not sure why you jumped on that one phrase…

  9. david walker

    Brandon, thank you for this article! Well explained, detailed and easy to follow.

    I was curious what your thoughts were about someone like a real estate appraiser qualifying for the real estate professional exemption. Obviously the hours requirement not an issue. Qualify? Similarly, loan agent Realtor (licensed of course).

    The IRS description seems so vague. Does it require that you be a property manager or a full time investor?

    Thanks again and thanks in advance for your time!

    • Kurt Stresau

      Get a qualified CPA or tax attorney to answer that question. See my comment above about me currently being audited for the very same issue. You might also try to get a direct determination from the IRS before you claim it. This is not something you want to play fast and loose with.

  10. Ivan Shao

    Great open-eyed strategy to tap into suspended passive loss. If I own a s-corp, can I use the year K1 ( distribution consider passive income right?) to tap into suspended passive loss? Or I have to be completely hand-off the business to achieve passive investor status?
    Question 2:. Can my wife become the stke holder of my s-corp to activate suspended passive loss?

    Thank you!

  11. Kurt Stresau


    I’m 5 years into my portfolio with 11 rental units. Both my wife and I strong strong W-2 income, which definitely meant that this issue was on my radar. Since I am so engaged with my properties, claiming real estate professional status was a no-brainer. That determination, of course, is now being questioned by the IRS in my audit.

    I elected to claim the RE status from 2014 onwards, as it allowed me to capture all of my passive losses. On paper, it really does look like my business is losing money. The last time I went back to look at financing for another deal from my trusty Credit Union, they were reluctant to finance the deal because of the paper losses.

    In your article you mentioned one line about explaining this subject to lenders. Do you have a suggested method for explaining this relatively straightforward concept to a financial Professional without insulting them? I felt like this should have been obvious to a professional Finance person, but they actually declined to finance the deal because of it.

    • Brandon Hall

      That’s not too surprising honestly. If you find smaller bankers or those that don’t work heavily with real estate investors, they may not feel comfortable taking on the risk.

      Our clients will generally just have me or a member of my team call the banker up and explain what’s going on. Obviously you can explain it just the same, but the letters “CPA” just provide them with more comfort.

      You’d think that they’d understand regardless, but we find that’s not always the case.

      And the ultimate answer is to team up with a broker/banker who works heavily or exclusively with investors.

  12. Jessie Huffey

    Awesome article! One other strategy that can be used in order to capitalize on the “under 150k income tax benefits” is to talk to your employer about re-allocating a portion of your salary into other benefits instead. Maybe you want to drive a company car, have a company credit card and expense account, have your company pay for medical and/or dental expenses not covered by insurance, etc. If your employer is smaller, flexible, and/or really, really loves you there are ways to be creative to re-allocate your income legally and get you under that 150k mark.

    • Brandon Hall

      Good thoughts though I’d be very careful in that you don’t accidentally trigger taxable fringe benefits.

      Using a company car for business purposes is not considered a fringe benefit, while personal use is a taxable fringe benefit. Personal use of a company car includes commuting to and from work, running errands or allowing a family member who is not a company employee to use the vehicle.

      So you can just as easily be pushing yourself above $150 without even knowing it. Or maybe people aren’t reporting it as income but will later be hurting when audited.

      Just be careful!

  13. Deanna Opgenort

    Since I’m still under $150k AGI I still get to count depreciation. Having “too much income” off a rental is a nice problem to have, but it still sort of a strategic tax issue since mine is a long-term investment. I have to keep an eye out for under-$2,500 projects that will add value to the property while not being considered “improvements” in order to offset the taxable income. I’m in the position that I don’t need income off the property, so excess stays in the house account as the emergency fund. It sounds weird to say that I am LOOKING for ways to (intelligently) spend money on my rental, but frankly, I’d rather “over-fix” the property a bit rather than give Uncle 30%. Occasionally it’s a battle of my inner Scrooge meeting HGTV (while being ruled by that kid that played Monopoly on rainy days).

  14. Cliff T.

    Great article Brandon! Can you clarify how depreciation recapture plays into this for high-income earners? My understanding is that the recapture tax (25% of amount depreciated) must be paid, regardless of if the depreciation benefited the tax filer.

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