Does Depreciation of one property Offset Capital Gains on another

Question

I am just looking for clarity on this matter.  If I have a bunch of depreciation in my holding company, can that be used to off set capital gains tax on my flips?

Dave Toelkes · Answer

@Matthew T.

Here is the clarity:

When you are flipping properties, there is no capital gain, ever, even if if takes longer than a year to sell the flip.  All your profit from the sale of a flip is ordinary business (active) income (reported on Schedule C if you are not using a business entity), and further subject to payroll taxes in addition to your ordinary income tax.

As a general rule, a rental property activity is a passive income activity and passive losses can only be used to offset passive income.  Depreciation can only be taken against the rental income that property generates.

There is a special exception to this passive loss rule in the tax code that applies only to passive losses from a residential rental property activity.  If your rental income minus deductible operating expenses minus mortgage interest and minus depreciation is a tax loss on paper, up to $25K of that loss (not the depreciation) from your rental property activity can be used to offset your other ordinary income.  This net passive loss allowance is capped at $25K and is phased out for incomes greater than $100K.  If your net passive loss is greater than the amount you are allowed, then the unused net passive loss attributed to each rental property in your portfolio is carried forward to the next tax year where it again offsets rental income.  When the sale of a rental property is a taxable event, then the accrued passive losses for that property can be used to offset your other ordinary income without regard to the $25K cap on the net passive loss allowance.

Sorry if this is not entirely clear, but answer is not as simple as the earlier posters suggested.

Bryan O. · Answer

@Matthew T. are you filing as a "real estate professional"? If not, there is only a certain amount of depreciation that will flow out to your normal income. @Alan Russell was right here as well, your flips are not capital gains, they are ordinary income.

@Brandon Hall

Dave Toelkes · Answer

@Bryan Otteson,

Since Matthew said that he "works" in property management I took that to mean that he is a W-2 employee in someone else's property management business, and thus Matthew most likely will not be able to qualify for Real Estate Professional status.

Bryan O. · Answer

@Dave Toelkes is correct for regular folks, but it is different if you are a REP, which it sounds like you may qualify for. Make sure and talk to your CPA.

Matthew T. · Answer

Thank you @Bryan Otteson

I will have to check on how I am filing.  I am in real estate/ property management full time so I would assume so.  So if I held them for less than a year and they are considered ordinary income then the depreciation I am claiming for my hold would flow through to over those gains, correct?  What if I held them for over a year?

Matthew T. · Answer

I do understand that but can I use the depreciation I am taking on my hold properties to offset the gain from flips?

Alan Russell · Answer

Depending on how long you hold your flips, they may not be Capital Gains but rather Regular income.  My understanding is if you hold them for less than 12 months they are taxed at regular income.

I am not an accountant so I would check with one on this to be sure.

Does Depreciation of one property Offset Capital Gains on another

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