$25,000 Offset Question???

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$25,000 Offset Question???

Carlton Wood
Insurance Agent · Piscataway New Jersey · Member since 2017 · 33 posts · 12 votes

What’s up BP!!! Have a question about the $25,000 offset I’m hoping someone could answer for me. To be clear I’m referring to the up to $25,000 in passive losses that the IRS allows you to offset your earned income by. 

I was reading up on the $25,000 offset and I’m a bit confused about how it’s calculated. One book I was reading spoke about multiplying your net loss by your effective tax rate and using that number to offset your income. Another book I read says to just take your net loss and use that number to offset your income.

Example 1

You make $10,000 in rental income, you subtract your expenses and depreciation and have a net lose of -$10,000. Assuming you have a W2 income and your effect tax rate is 22% you multiply that by -$10,000(.22X-$10,000) and get -$2,200 and you can offset your income by $2,200. So if you made $82,000 you could lower your taxable income to $79,800.

Example #2

You make $10,000 in rental income and you subtract your expenses and depreciation and have a net loss of. $10,000. You take they negative -$10,000 and offset your income by the whole $10,000. So if you made $82,000 you would lower your taxable income to $72,000

Of course both examples are assuming you made no more than $100,000 and you were involved in your real estate business enough to qualify for the offset.

Which example would be the proper way to calulate the offset?

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Carlton Wood:

    What’s up BP!!! Have a question about the $25,000 offset I’m hoping someone could answer for me. To be clear I’m referring to the up to $25,000 in passive losses that the IRS allows you to offset your earned income by. 

    I was reading up on the $25,000 offset and I’m a bit confused about how it’s calculated. One book I was reading spoke about multiplying your net loss by your effective tax rate and using that number to offset your income. Another book I read says to just take your net loss and use that number to offset your income.

    Example 1

    You make $10,000 in rental income, you subtract your expenses and depreciation and have a net lose of -$10,000. Assuming you have a W2 income and your effect tax rate is 22% you multiply that by -$10,000(.22X-$10,000) and get -$2,200 and you can offset your income by $2,200. So if you made $82,000 you could lower your taxable income to $79,800.

    Example #2

    You make $10,000 in rental income and you subtract your expenses and depreciation and have a net loss of. $10,000. You take they negative -$10,000 and offset your income by the whole $10,000. So if you made $82,000 you would lower your taxable income to $72,000

    Of course both examples are assuming you made no more than $100,000 and you were involved in your real estate business enough to qualify for the offset.

    Which example would be the proper way to calulate the offset?

     Yes, you would offset your ordinary income by the total loss. Not after multiplying with your marginal tax rate. 

    If you do your own tax return, when you fill out your schedule E info and take all the deductions, your software will automatically pull your full alllowable losses to offset your ordinary income. 

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  • Carlton Wood
    OP
    Insurance Agent · Piscataway New Jersey · Member since 2017 · 33 posts · 12 votes
    7y
    Thanks for your response!! This is what I thought, however I was reading the loopholes of  real estate and the book gave an example of multiplying your paper loss by an effective tax rate of 35% to calculate your tax savings. It kind of through me for a loop.... no pun Intended
    Originally posted by @Ashish Acharya:
    Originally posted by @Carlton Wood:

    What’s up BP!!! Have a question about the $25,000 offset I’m hoping someone could answer for me. To be clear I’m referring to the up to $25,000 in passive losses that the IRS allows you to offset your earned income by. 

    I was reading up on the $25,000 offset and I’m a bit confused about how it’s calculated. One book I was reading spoke about multiplying your net loss by your effective tax rate and using that number to offset your income. Another book I read says to just take your net loss and use that number to offset your income.

    Example 1

    You make $10,000 in rental income, you subtract your expenses and depreciation and have a net lose of -$10,000. Assuming you have a W2 income and your effect tax rate is 22% you multiply that by -$10,000(.22X-$10,000) and get -$2,200 and you can offset your income by $2,200. So if you made $82,000 you could lower your taxable income to $79,800.

    Example #2

    You make $10,000 in rental income and you subtract your expenses and depreciation and have a net loss of. $10,000. You take they negative -$10,000 and offset your income by the whole $10,000. So if you made $82,000 you would lower your taxable income to $72,000

    Of course both examples are assuming you made no more than $100,000 and you were involved in your real estate business enough to qualify for the offset.

    Which example would be the proper way to calulate the offset?

     Yes, you would offset your ordinary income by the total loss. Not after multiplying with your marginal tax rate. 

    If you do your own tax return, when you fill out your schedule E info and take all the deductions, your software will automatically pull your full alllowable losses to offset your ordinary income. 

    1Reply
  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    @Carlton Wood

    Thumbs up on making your way thru the maze of the tax rules. Understanding the $100k and $150k thresholds is pretty rare among new investors, and even seasoned ones.

    If you made $82,000 and had a $10,000 rental loss, your total income will drop to $72,000 which results in your taxes reduced by about $2,200.

    The numbers can actually end up being different for many reasons (like state taxes, for example), but this is good enough for a general idea.

    I have no clue what was the full example in that book. Maybe it was wrong, but more likely that there were some important details you did not include. My advice is to copy the entire example as a different post, so we can respond.

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  • Carlton Wood
    OP
    Insurance Agent · Piscataway New Jersey · Member since 2017 · 33 posts · 12 votes
    7y
    Thank you!!!! Originally posted by @Michael Plaks:

    @Carlton Wood

    Thumbs up on making your way thru the maze of the tax rules. Understanding the $100k and $150k thresholds is pretty rare among new investors, and even seasoned ones.

    If you made $82,000 and had a $10,000 rental loss, your total income will drop to $72,000 which results in your taxes reduced by about $2,200.

    The numbers can actually end up being different for many reasons (like state taxes, for example), but this is good enough for a general idea.

    I have no clue what was the full example in that book. Maybe it was wrong, but more likely that there were some important details you did not include. My advice is to copy the entire example as a different post, so we can respond.

    0Reply
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