AGI $100,000 Can't deduct rental losses?

Question

Hi there

I am new to investing, looking at a SFH for my 1st rental property and trying to understand the tax benefits that are often spoken of on the podcasts.

But, my CPA says that because my AGI is >$100,000, I am not able to deduct rental looses that exceed my rental income.  The losses accrue until I either have a profit to net them against sell of the property (which I am going to buy and hold).

Also, I will be putting in $30,000-40,000 in upgrades to get it rental ready.  CPA says that will be depreciated over the 27.5 years.

I am trying to understand how this will effect me on a yearly basis. Any insights to help me is most appreciated.

Thanks so much

April

Kelly O'Keefe · Answer

Hi @April Birdsong

Without knowing all the specifics of your situation it is hard to give a definitive answer. There is a phase out between 100-150k that can limit the amount of loss you can take. However, if you are qualifying for material participation then you have the ability to take those losses and offset your active W-2 income; which is probably what you heard in the podcast. Other beneficial tax strategies would be a cost segregation study and bonus depreciation which would allow you to accelerate your depreciation and not have it set at 27.5 years.

Hope this helps

Account Closed · Answer

Hey April, your CPA is correct in the sense that you can only write off passive income against other passive income. Rental income if you are not a real estate professional is considered passive income, even with the repair efforts you are doing. If you qualify as a real estate professional you can reclassify certain rental activities as active, and take the deduction against your active income. Your current situation unfortunately would not qualify for that.

David M. · Answer

@Basit Siddiqi Right, but I don't think they are overlooking it.  They are being "sold" on real estate providing so much tax benefit that it includes deduction against their regular income... (sigh)

Arn Cenedella · Answer

@April Birdsong

My understanding is the ability to deduct rental losses phases out from $100,000 to $150,000.

AGI above $150,000 no ability to take deductions.

Limit in any case is $25,000 per year.

As AGI goes above $100,000, the $25,000 limit is reduced. Every dollar above $100,000 reduces $25,000 by 50 cents.

Basit Siddiqi · Answer

One often over looked over benefit of real estate investing is that the cash-flow is normally not taxed because it is shielded by depreciation.I think too many people get stuck on wanting real estate losses to offset their wages.I am getting 8% cash on cash return in real estate that is being shielded by depreciation.Plus I estimate that I am getting 4% appreciation on an annual basis.This 12% tax deferred return will build my wealth overtime.

David M. · Answer

@Michael Hill No.  They are both pass-through entities.  So, the taxation is really the same.  LLC's don't change the taxation.   They are really for the legal limited liability protection.

If anything, the S-Corp election may make it worse.  If youdid have profits, you'd have to pay yourself that reasonable salary, thus recharacterizing passive income into active income.  Also, S-Corps are apparently more corp-like, and its not advisable to hold real property in corporations.

Michael Hill · Answer

Would these rules change if the REI business was an S Corp vs llc?

David M. · Answer

@April Birdsong

As mentioned, material participation of $25k allowable deduction phases out between a modified AGI of $100k to $150k.

You might be able to deduct some of the upgrades if they were smaller chunks.. maybe?

The Real Estate Professional Status (REPS) is a little misleading from the name.  It has nothing to do with being a real estate agent.  Generally, most people do not qualify since it requires you to do be doing more than half your time as in real estate related activities.  So, if you have a full time job which is notionally 2000 hours a year, you'd have to being doing real estate for at least 2001 hours..

This is pretty normal.  Investors aren't always bring their Passive Allowed Losses (PAL) onto their 1040 to deduct against their regular income.  They are carried forward year over year.  Its a little often mentioned added benefit that when you sell, these "credits" help offset your gains.  So, many times you don't have to 1031.

So to your question about yearly basis, IN GENERAL, your tax liability should look like as if you just had to your salary.  Any actual/paper losses with your rentals will be carried over year after year as PAL.  If your rentals are positive, the PAL will be used to offset those gains so there won't be any tax liability until the PAL is used up.

Hope this helps.  Happy to chat.  good luck.

AGI >$100,000 Can't deduct rental losses?

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