Best way to Lower Tax Bracket by Adding my Father?

Question

Hello everyone, I am a rookie and need some light.

My spouse and I are recently closed on a LTR under LLC. Both of us are w2's with  AGI >150k. We have read that even if you're an active investor, if AGi >150, there will be no deductions.

1. Is that true, will we even the losses from depreciation at all?

2. We cannot qualify as an REP since we only have 1 unit. and even if we convert to STR, we might not be able to qualify because we will use a property manager.  Can we or Is it wise to add my Non- working & senior father in our LLC so that our tax brackets will be lower?

3. And if so, by how many percent?

Thanks a lot everyone!

Ashish Acharya · Answer

1) "We have read that even if you're an active investor, if AGI >150, there will be no deductions." You don't get the deduction is not correct. You get the deduction but the losses get limited.

2) Yes, your losses will be limited and suspended/

3) You can use STR but it has to be managed correctly.

4) Paying dad is not helping at all because it will only increase your losses that were limited anyway.

Wayne Brooks · Answer

@Catherine Javier To use the depreciation against your W2 income, over $150k, you’d have to meet the Real Estate Professional standards, not just be “active” in the management.  This would require documentation of at least 750 hours per year in real estate activity.  Doing an llc could sift some of the income to your father, but you and your wife still get taxed on what You receive at your rate, your gets taxed on what He receives at his rate.

The good news is 1) the depreciation loss will carry over to when you sell 2) unless you’re going to 1031 forever, depreciation is just “an interest free loan” anyway, as you add the depreciation back as income when you sell.

Catherine Javier · Answer

Thanks @Ashish Acharya!

If we do STR, and we hire a property manager because we work W2 out of state, I dont think we can qualify for 100 hrs material participation.

I am reading Tom Wheelwright’s book and I came across about adding a parent with low tax bracket thats why I became interested. Did I misunderstood it?

Thank you so much!