Tax deduction for losses

[Alexi Polenur]

Hi,

I have couple of rental properties which currently generate losses (because of depreciation etc).

My accountant is telling me that I cannot deduct losses from my income because I make more then 150k at my day job. Thus I cannot take advantages of losses I have on my rental properties.

Any suggestion how I can put this losses to good use to decrease my taxes ?

I am open to any suggestions (forming LLC or what ever).

Thanks in advance for your help, Alexi

[Jon Holdman]

The short answer is you cannot. The tax advantages are often sold as one of the positives of real estate investment, but the limitations are often overlooked.

The only way you can get this deduction is to become a "real estate professional". That's an IRS term and has nothing to do with licensing. You're a RE professional if you spend at least 750 hours a year doing real estate activities AND spend more than you do on anything else. If you have a full time job, 2080 hours per year, you need to spend 2081 hours a year doing real estate.

If you're married, and your spouse doesn't work, maybe she can achieve the 750 hours.

The other gotcha is that you have to pay this back when you sell. As you taking depreciation (or supposed to be taking it if you don't) your basis in the property is reduced. When you sell, you gain is that much higher. AND, you'll pay "depreciation recapture tax" on the amount of gain up to the amount of depreciation you took (or should have taken.)

You can carry forward those passive losses you can't take, and then subtract them off the gain when you sell.

The losses can protect the rental income.

Really, if you have a good deal, you should have very little passive loss. The depreciation will offset some or all of the rental income. Unfortunately, the supposed tax advantages are often used to dress up a crummy deal and make it seem more attractive than it really is.