Real Estate Investor · Elkhorn, WI · Member since 2008 · 453 posts · 104 votes
I have a meeting with my accountant later next week. However I would like to be able to speak intelligently with him, so I'm looking for some information.
I have a day job, my wife stays home with the kids. We are both on the LLC for the rental property (more properties on their way). If I claim the rental properties on my taxes, I can't take a loss, correct? I can only even out to $0. If my wife (assuming she works X number of hours per year) claims the properties on our taxes, she can take up to a $25k loss because she works more hours in the business than any other job. Is this generally correct?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
So, I'm not a CPA, let alone a good one, and you should find a good one.
If you're married filing jointly, there is not "I claim" "she claims" question. You're both claiming the property because there's no distinction.
You're confused about the $25K loss. I assume you're referring to the $25K "special" passive loss allowance. You (two) will be able to use that if 1) you actually have passive losses on the rentals, and 2) your AGI (for the combined, married filing jointly return) is under $100K. If its over $150K, you can't take this at all. In between, it phases out, $1 gets phased out for ever $2 of AGI over $100K.
Its possible to take MORE passive losses than the $25K special allowance if one of you is a "real estate professional". You're correctly noticed one criteria is "works more hours on the business than any other job". The other criteria is to work at least 750 hours a year on the business. If that's true of your wife, you can take unlimited passive losses, regardless of AGI.
I don't think you'll actually generate huge losses, even with depreciation, on an individual property. Well, unless they're really bad deals. If you've bought properties based on the 50% rule, and net income on the properties is something close to 50% of the gross scheduled rent, then you should end up with roughly zero taxable income after depreciation.
So, be sure you really understand what's an expense and what's a capitalized item. If you buy a property, fix it up, and rent it out, the fixup costs are not expenses. They adjust the basis of the property, and reduce your gain when you sell.
I'll admit I'm not really sure exactly how this all works. I sent my accountant all the receipts, HUD-1's, and an explanation of what happened when, and he generated a tax return. Now that he's done with all the filings, I'm going to meet with him and have him go over my return in detail so I can understand exactly how the various payments I made were handled.
I really recommending finding a good CPA who understands real estate. And chat with him before you do deals and get his advice on how to structure things up front.
Real Estate Investor · Elkhorn, WI · Member since 2008 · 453 posts · 104 votes
17y
Jon, thanks for the help. You are correct, I am misunderstanding capital expenses and operating expenses. Since my property does fall well within the 50% rule, I probably will not have a loss...although the assessed value is pretty high, my cash flow will be pretty high as well. Perhaps I can ask him some questions over the phone instead of meeting with him. My accountant is a real estate investor with many years of experience with buy and holds.
Real Estate Investor · Elkhorn, WI · Member since 2008 · 453 posts · 104 votes
17y
after re-reading your reply, I noticed that because of our AGI we will not qualify. That is not good news. But tax free income is good, so I'll take that!
-Rich
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
That's really the best you can expect. The whole idea of "tax advantages" for rental properties is way overblown. Good deals don't generate very much (or any, for really good deals) passive loss even with the depreciation. Then, only if your AGI is low can you take it, and that's subject to the $25K limit.
Keep in mind, you do carry the losses foward and can take them in total when you sell. But, then you have the depreciation recapture tax, so again, not as great a deal as we're sometimes led to believe.
Real Estate Investor · Elkhorn, WI · Member since 2008 · 453 posts · 104 votes
17y
At our REI meeting last night, they had some guy stand up and say that he can legally get around the depreciation recapture tax. Didn't sound legit to me...but what do I know. I'm learning very valuable info every day.