I make too much money...

Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes

So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

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Daniel DietzPro Member

Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes

You have been getting some great advice here. There is a difference between having some tax free income, and actually reducing your *other* taxes due from W2s, K1s etc....

Meaning this..... say you buy a few rentals and your income is 100K. Deduct interest of 60K, PM of 10K, repairs of 10K, and you are left with 20K of "current cash flow". Now come in the depreciation (a non cash 'cost').... lets call that 40K, so you are sitting at -20K from a tax perspective. *This* is where "not being able to use real estate 'loses' " comes in.

You get to keep that 20K of current cash flow, and use *half* of the depreciation to bring your taxable income down to 0K, but you *dont* get to take the *other* 20K and count a 'lose' against your *other* income. My understanding is that this "suspended lose" *can* be 'carried forward' and used against future passive income or else when you sell to help offset capital gains. So not a total lose at all, just a postponing.

This is just my understanding of how my tax guy explains it to me, I am *not* a tax pro, at ALL ;-)

[email protected]608-524-4899

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Carl FischerPro Member
Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
6y
There are several strategies that possibly can be utilized for tax savings. Are you married? How much real estate are you going to buy?
[email protected]215-283-2868
8 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Carl Fischer thanks for your response Carl. I i’m married with four children. And I am looking to purchase my first property. eventually I will have many..
0 Reply
Martin Carstens
Investor · Eagle, ID · Member since 2014 · 82 posts · 75 votes
6y
Ralphie, what a good problem to have! The tax breaks could be in the future. There are more then one way to get tax breaks. The depreciation could kick in at the time of sale. Maybe when your retired and have less income to declare? Dig into this more, and get educated on the different angles of tax savings.
Best of luck!
5 Reply
Christopher Smith
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
6y
I suppose that what your CPA is referring to is that your passive losses will be currently limited. My solution to that is purchase properties that generate gains not losses.

I don't worry about loss limitations since I don't have any losses only gains. What are the tax benefits of that?

Depreciation that renders only about half my annual cash flow taxable.

Sec 199 benefits that allow me to reduce my net rental income by another 20% of that amount.

Appreciation that is not currently subject to any tax, and in my case will likely never be subject to tax. My properties are in CA so appreciation has been massive as they were acquired during the housing crises.

So I get beaucoup tax benefits regardless of how much I make at my regular job.
11 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Martin Carstens thank you Martin very helpful.
0 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Christopher Smith thank you Christopher very helpful..
0 Reply
Carl FischerPro Member
Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
6y
@Ralphie Hernandez
Consider the possibility of your wife being a real estate professional to start. Not sure about the kids ages etc.
Also Look at tax advantaged plans IRAs , 401ks, HSA’s, CESAs, etc to use for real estate and real estate related investments.
Similar to being the gold miner or the seller of pucks and shovels.
[email protected]215-283-2868
6 Reply
Mitchlyn D.
Rental Property Investor · Jacksonville, FL · Member since 2015 · 342 posts · 142 votes
6y
@Ralphie Hernandez Look to get an investment friendly CPA. For some write offs you will have depreciation, taxes, interest, just to name a few.
You can even get creative and hire your kids.
2 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Ralphie Hernandez:
So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

Your CPA is correct that you won't be able to reduce your current taxes with rental losses (unless you can use a loophole of making your wife a full-time investor, as @Carl Fischer hinted).
However, this situation is temporary. The losses are not wasted but saved for the future. The future comes when you sell the property. This is when you catch up with the old losses.
That said, you're looking at the whole real estate game from a flawed perspective: tax savings. You buy real estate for passive cash flow and for long-term appreciation, aka wealth building. Tax benefits are just the icing on this cake.
9 Reply
Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
6y
You have been getting some great advice here. There is a difference between having some tax free income, and actually reducing your *other* taxes due from W2s, K1s etc....

Meaning this..... say you buy a few rentals and your income is 100K. Deduct interest of 60K, PM of 10K, repairs of 10K, and you are left with 20K of "current cash flow". Now come in the depreciation (a non cash 'cost').... lets call that 40K, so you are sitting at -20K from a tax perspective. *This* is where "not being able to use real estate 'loses' " comes in.

You get to keep that 20K of current cash flow, and use *half* of the depreciation to bring your taxable income down to 0K, but you *dont* get to take the *other* 20K and count a 'lose' against your *other* income. My understanding is that this "suspended lose" *can* be 'carried forward' and used against future passive income or else when you sell to help offset capital gains. So not a total lose at all, just a postponing.

This is just my understanding of how my tax guy explains it to me, I am *not* a tax pro, at ALL ;-)
[email protected]608-524-4899
13 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Daniel Dietz so much good info. Thank you
0 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Michael Plaks good info thank you very much...
1 Reply
Guy Yoes
Rental Property Investor · Springfield, MO · Member since 2017 · 266 posts · 312 votes
6y
Why would you sell your property and pay capital gains when you can 1031X them and defer all taxes and depreciation?
You make money in REI in many ways. You can deduct repairs and improvements which increase property values. You can collect income from rent. There are numerous write offs and tax advantages.
Best of all you can own your own business and control your destiny.
2 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Guy Yoes. Yes I’m in a Good place. my job allows me to put back all money made from investments right back in to grow. Thanks Guy
0 Reply
Ronan DonnellyPro Member
Investor · New York City, NY · Member since 2012 · 332 posts · 385 votes
6y
Originally posted by @Ralphie Hernandez:
So today I called my CPA to let him know that I’m going to be buying rental properties in the near future. I Wanted to get some insight on some of the tax breaks I would be getting for having rental properties, he informs me that because I make too much money in my regular job that I will not qualify for tax breaks on my rentals. So my question is how is this going to affect my bottom line?

Focus on getting deals with good fundamentals and let the tax benefits be the icing on the cake. Avoid deals that only satisfy tax benefits.

[email protected]
4 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Ronan Donnelly. Thanks Ronan
0 Reply
Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
6y
@Ralphie Hernandez, I have a Private Money Partner that I am going to be doing a few deals with over the next couple of years who also is unable to us the 'curent tax lose benefit' of real estate. He is looking much more at the long term benefits of loan paydown and appreciation.
In regards to having to us the loses in a 'deferred' manner he thinks of it this way; "It is like deferred compensation". Meaning that the tax deferment, lets say 100K over the years, will kick in when we sell some day to offset his capital gains half of his capital gains of say 200K (at least that is my understanding of it). So so that might save him 20-30K in taxes.

[email protected]608-524-4899
0 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
6y
@Ralphie Hernandez as some others have said this is a likely a misleading answer from your CPA, best to have a thorough conversation with them (and perhaps make sure they are well versed in real estate tax issues and recent changes)
2 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Jonathan R McLaughlin definitely need to sit down and have a thorough conversation with him. Understanding every aspect of my business is crucial to my success. I want to know everything... Thank you
1 Reply
Ralphie Hernandez
OP
Specialist · Fort Myers, FL · Member since 2020 · 20 posts · 6 votes
6y
@Daniel Dietz Thanks Daniel good info..
0 Reply
Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Mitchlyn D.:
@Ralphie Hernandez Look to get an investment friendly CPA. For some write offs you will have depreciation, taxes, interest, just to name a few.
You can even get creative and hire your kids.

Unfortunately this is all kind of a moot point to this discussion- the issue is at his income level passive losses can't be used.
So if he does all of those things- and generates a $5k, or $10k loss...he won't be able to use it. It won't actually reduce his taxable income at all.

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5 Reply
Tom Kastorff
Rental Property Investor · Las Vegas, NV · Member since 2014 · 137 posts · 118 votes
6y
Ralphie I am curious as to what you were expecting to hear from your CPA, as it sounds like there was an expectations gap? Did you read, or were you told something else that made you believe that "buying rental properties in the near future" directly correlated to massive tax breaks? I think it would be best to start with what you expected vs. what you heard. You didn't really provide any detail around that.
Rental properties are taxed as normal income. Meaning, if you make $100k in your day job, you have a rental that grosses $20k but nets you $10k in cash flow, you now have total annual income of $110k and will get taxed as such. You will factor in the mortgage, prop taxes, expenses, capex, losses, and all that, to hopefully "zero out" the gains, but that is not guaranteed. As many pointed out, the long term benefits of rental properties typically far outweigh the short term. Capital pay down, appreciation, and hopefully cash flow are all gains. If you are thinking of owning rental properties purely from the desire to tack on tax breaks to your current income, IMO that is a wrong expectation without some unusual circumstances and tax strategies.
2 Reply
Tom Kastorff
Rental Property Investor · Las Vegas, NV · Member since 2014 · 137 posts · 118 votes
6y
@Natalie Kolodij responded while I was typing mine out, she is spot on.
1 Reply
Al Pat
Rental Property Investor · Atlanta, GA · Member since 2016 · 325 posts · 253 votes
6y
@Ralphie Hernandez declare your wife as an active real estate professional and you can deduct the losses against your income. This is easy but hard part is finding a CPA that guides you well. Check out the video series of Mark J Koehler on YouTube and you got all your answers as he is CPA and attorney.
1 Reply
Prashant Sheth
Rental Property Investor · Member since 2017 · 75 posts · 19 votes
6y
@Ralphie Hernandez would a fix-heavy investment be a strategy for you? You can get a property that's waaay below market and requires a lot of fixesC but in LLC and "invest" in fixes. That's a write-off on expense. You would also get depreciation and rent loss while in make/ready to offset the income. That'd be a one-time thing. And you can repeat with the income you generate?
Great problem to have!
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