REI deductions with fulltime job pay

7 Replies

I just bought a triplex in Bemidji MN.  I work full time, my wife and I file jointly around $110k income.

The house cost $168,500.  If I have a negative cashflow on paper or IRL this year, will I decrease my taxable income from my full time job?

If so, Is there a pay bracket cutoff where you cannot anymore?

Examples, I make $110k, rental income is 25k, and I have 30k in deductions.  Will my taxable income go down to $105k, or does that extra deduction carry over until I have a positive year?

Thanks!

Eric Nelson

Hi Eric, 

Typically passive income/losses (rental income) can only be used to offset other passive income. 

HOWEVER 

There is a small tax payer exclusion that allows deduction of up to $25,000 annually of losses if you're under a certain AGI. 

The phaseout for this deduction begins at $100k for married couples and reduces the allowable loss  of $25,000 is reduce by 50% of the amount that your AGI exceeds $100k...until $150,000 at which point the loss is disallowed completely. 

This means that with a good tax professional and some tax planning you should be able to reduce your AGI to ensure you meet this allowable loss limitation. 

@Eric Nelson

In your example - yes, it will reduce your adjusted gross income (AGI) from $110k to $105k. ("Taxable income" has a specific meaning, different from how you use it, but it will also go down by $5k.)

At $110k, you have room to "lose" up to $20k. At $130k, it will shrink to $10k. At $150k, it will disappear.

A good tax accountant can help you squeeze more losses out of this property - maybe $10k or $15k, instead of $5k.

Thanks for the clairification.

So, my brother makes over $150k, and thus will not be able to deduct below zero.

I heard something on a podcast about if you are a real estate professional, 1050 hours a year, you can claim the loss no matter what.  So, when they get more properties, will they be able to have her do this and get more deductions?

Thanks again!

Originally posted by @Eric Nelson :

Thanks for the clairification.

So, my brother makes over $150k, and thus will not be able to deduct below zero.

I heard something on a podcast about if you are a real estate professional, 1050 hours a year, you can claim the loss no matter what.  So, when they get more properties, will they be able to have her do this and get more deductions?

Thanks again!

Your brother will not qualify for RE Pro if he has a full-time job. One of the requirements, besides the 750 hours (not 1,050), is that he spends more time in RE than in any other money-making projects, including jobs. So if his job is 40 hours a week, he would need to spend another 41 hours each week in RE - which is impossible. 

If he is married, and his wife does not have a full-time job - maybe she could qualify. RE Pro is a very complicated topic, and should be discussed case by case with a tax pro.

@Eric Nelson I would add that any passive losses that you cannot utilize because of the AGI limitation you still will want to report those losses. These losses will be suspended until the future until you have passive income (other rentals) or you sell that specific property and you can use the losses to potentially offset some the gain on sale. Basically, those losses will be used, it's just a matter of when. 

Disclaimer, I'm not a CPA and you should always consult one for tax advice.

In my experience it cannot be deducted from your W2 wage income and fill not affect your AGI. It will be a passive loss that can be carried over and used against future positive real estate income.

Originally posted by @Josh Engelhart :

Disclaimer, I'm not a CPA and you should always consult one for tax advice.

In my experience it cannot be deducted from your W2 wage income and fill not affect your AGI. It will be a passive loss that can be carried over and used against future positive real estate income.

 It can if you're AGI is under $150k. See above comments.