No Tax Advantages for New Investor?

Question

BP community,

I have been following BP forever, and purchased my first rental property in May of 2024. On the hunt for a second. Now that I am seeking tax pro's through BP portal, I am hearing that there are NOT mechanisms to offset my W-2 income because it is a mid-term rental, and I make over 150k. I have heard so many times that there are "tax benefits" and "offsetting w-2 income" as one of the advantages of real estate and feel a a bit frustrated.

I lived in the property and completed most of the rehab myself, now its ready to rent. I was seeking counsel for best way to set up LLC and to take maximum advantage of 2024, only to learn not much can be done.

I have been tracking every expense thinking that part of the reason was for some sort of tax impact. Should I seek other opinions or have others found that in the fine print, there really isn't much at first?

Also, what "tax advantages" or "offsetting w-2 income" are folks mentioning on so many BP episodes as an advantage?

Staying positive because I know the benefits, and I am committed. Hoping for some insight. Thanks all!

Natalie Kolodij · Answer

That's correct.

Rentals as passive so if your AGI is over $150k you can't use the losses to offset your other income sources like your W2.

You should be tracking every expense. It's a business. You want to report all valid income and expenses.

When a passive loss is disallowed it carries to the next year. So you don't lose the benefit-you just don't get it right now.

You will be able to use those disallowed passive losses:

-Against other passive income

-If this rental has net income in a later year these disallowed losses will offset that income

-When you sell a rental those carried over disallowed losses offset the gains on sale

Other situations you hear about where people CAN use the rental losses to reduce W2 income are where the rentals qualify to be Non-Passive

This typically happens in the following two situations: Real Estate Professional Status- A taxpayer or their spouse spends at least 750 during the year on real estate- and more time on it than anything else. (this is simplified but basically can't have a W2 job; must be FT real estate in some way)

Short Term Rental Loophole -If an average guest stay during the year is 7 days or less and you materially participate in the property it is by definition non-passive.

With mid-term rentals if your average guest stay is 30 days or less but you provide substantial personal services (daily maid service, meals, shuttles etc, more like a hotel) then it would be non-passive...but you'd also pay self employment tax on any income as well.

Adriana Hutchins · Answer

Yes, so disappointing! I did go to a tax consultant and felt like I could've just done the taxes myself.  I was expecting some sort of break but I guess not.

Fulton Sanchez · Answer

Hi Travis. The ability to offset W-2 income from mid-term rentals can be limited. Most tax advantages discussed on BP involve depreciation, deductions, and strategies like real estate professional status or short-term rental loopholes. You may want a quick consult with a CPA specializing in REI to clarify your specific situation. Here is the best place to reach one.

Henry Clark · Answer

OP.  You need to talk with your tax preparer or do more specific reading.  But as mentioned already it is specific to your situation.

You have been living in the unit???  How long???  As a primary residence??  If you can live there 2 out of 5 years as a primary residence, then $250,000 capital gain is not taxable per spouse.

You said you had a partner in another of your posts. What does that mean? Ownership? Primary residence?  Etc.

What types of expenses have you recorded related to this investment other than brick/mortar, or other physical attributes of the house itself?

The fine print is your personal situation.  Versus on a post.  Take your tax return, the asset itself and sit down with a tax professional and discuss how to maximize your returns.

Also, don't do things just for a Tax advantage.  Do you have a website and a child?  Did you use your vehicle, phone, computer, internet service?  How much would your normal rent be, if you rented or bought somewhere?  Are you a medical professional?  Do you have a 401k, Solo, IRA, etc?     Do you have two vehicles?  etc etc.

Jason Malabute · Answer

Hey Travis,

Since your rental is considered passive and your AGI is over $150k, you can’t use the losses to offset your W-2 income. However, you can still use the losses to offset other passive income or carry them forward to offset gains when you sell the property.

There are two main exceptions where rental losses can offset W-2 income:

1.	Real Estate Professional Status: You or your spouse must spend at least 750 hours per year on real estate activities, and it must be your primary occupation.

2.	Short-Term Rental Loophole: If your average guest stay is 7 days or less and you materially participate, it’s considered non-passive, allowing losses to offset W-2 income.

Track all your expenses because disallowed passive losses carry forward to future years and can be used to offset future rental income or capital gains. Let me know if you have any more questions!

Nicholas L. · Answer

@Travis Kumar

are you working with a CPA?  they will be able to give you the best advice as they will have much more information than we do.

i believe that in a specific year, passive losses are phased out over $150K as you noted, but they are just suspended.  so, that would be something to talk to your CPA about.

other investors may have REPS.  those of us with full time W2s generally cannot claim REPS unfortunately.

How to Become a Real Estate Professional Status (REPS) | White Coat Investoreveryone's tax situation is different and no one but your CPA should give you tax advice.

hope this helps.

No Tax Advantages for New Investor?

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