Passive Losses Offset Active Income
Thoughts on Adam Neumann's real estate strategy post-WeWork? It sounds like he is using depreciation to create passive losses so that he can offset active income from his enormous golden parachute? If so, it seems like a smart strategy. This is from the RealDeal article yesterday:
"And thanks to a special tax classification for real estate professionals, Neumann and his family may be able to shelter an extra $500,000 of his golden parachute. What’s more, he could exploit the latter loophole each year, provided that he remains a real estate professional. But that is not a shoo-in. The hurdles are not minimal to being considered a real estate professional,” said Donald Williamson, professor of accounting and taxation at American University. The tax classification would be hard to achieve for anyone moonlighting as a property owner. Its strict requirements include spending half of one’s time on business related to real property, and at least 750 hours, in a given year.
“Most real estate professionals are agents or brokers who believe in the product, and work hard on a handful of properties they own,” said Williamson. The main barrier is that people often spend too much time doing other things."
@Jon Fletcher he’s an interesting guy! Passive losses do not offset active income thi. What the article’s theory is that he can become a REP and flip the losses to active vs passive. However, if the writers dont prepare Adam’s return they are just guessing he is claiming REP and nobody actually knows. If he is not REP, his passive losses from RE would not offset any active income he may have
@Greg O'Brien Got it - so the passive losses become active losses because he is considered a Real Estate Professional. That makes sense!
Yes, you have to have REP status in order to do so. This is a common misconception for limited partners who are investing into syndications.
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I don't find it particularly helpful to read about people with $200M buyout packages. It's not my world.
But since you posted this article, let's look at the key numbers, per this article's very superficial review:
- $200M golden parachute received
- majority stake in a $1B rental portfolio purchased
- $500k of income potentially sheltered
In other words, he might shelter 1/4 of 1% of his windfall! 0.25%! And he had to buy half of $1B portfolio for that.
He probably made a great acquisition, but it was not a tax strategy he was after. Taxes play almost no role in his situation, even if he can shelter 10 times as much income as the article suggests.
There is a barrier between 1) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation".
If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.
Explained in a different way...
1) There are ordinary/W2/active income on one side. Lets call that the :( side.
2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.
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For the 100th time, NO, @Lane Kawaoka, you normally canNOT use syndication losses against your regular W2 income, even with REPS status. I wish you stop distributing this misinformation in every other post of yours. As a syndicator/sponsor yourself, YOU can, but your passive investors cannot.
I wrote a detailed post about this recently: https://www.biggerpockets.com/...
I have gotten differing opinions on this but is there any way to obtain REP status without owning your own rental properties that you manage yourself. Examples would be a real estate agent who is active, does it >50% of the time and >750 hours? Another example is if someone is on the general partner side of deals and actively participates. I have gotten the most wishy washy answers specifically in relation to those who are real estate agents and how to qualify.
Thanks in advance.
I'm just reporting what a lot of other investors are doing. As if you are using a free forum as tax/legal advice... that is not smart either way cause every situation is personal.
There are definitely hoops to jump through.
Other options are oil and gas deals and land easement both of which I personally don't do and I think should be the last resort.