W2 earned income to real estate investing.

Tax, SDIRAs & Cost Segregation
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W2 earned income to real estate investing.

Marek J.
Chicago, IL · Member since 2017 · 19 posts · 2 votes

Hello, I like my w2 job. I also want to invest in multi family real estate. How would keeping my normal job affect my taxes? I want to essentially invest all money earned from my regular job and invest into real estate. As real estate is a business would this reduce my tax liability on the regular job? They always talk on the podcast how you invest in your business.

Would buying real estate and investing in my real estate reduce my tax liability on the earned income? Essentially as I invest the money from my day job I don’t have it so I shouldn’t be taxed on it.

Any ideas would be appreciated.

Thank you

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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Michael King:

@Natalie Kolodij @Basit Siddiqi

You mention $150K threshold on W2. I make more than that on my W2, but my wife makes nothing (stay at home mom) but we file married filing jointly. Is there a higher threshold in that instance. 

Sorry @Marek J. I didn't meant to hijack your thread.

 Nope still $150k unfortunately 

But if your wife doesn't work and she's who manages your properties talk to your tax professional about potentially qualifying for RE professional status with the IRS. 

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y

    Rentals are Passive Income. 

    W2 is active/ordinary. 


    If your AGI on your 1040 is < $150k you can use up to $25k a year in passive losses to reduce your w2 income. 

    If your AGI is > $150k then any losses from your rentals won't be able to offset your w2 income. 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Marek J.

    Tax laws surrounding passive losses can be very complex. Normally net passive losses can't be utilized on your return to offset other income.

    There is an exception is if you have passive losses from rental real estate. If you make below $150,000, you may be able to offset some rental losses against your W-2.

    In the event that you can't utilize the passive losses in the current year - you don't lose them, they just get carried forward.

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  • Andrew HoganPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes
    6y

    Like Natalie and Basit pointed out, unless you qualify as a full-time real estate professional, you can't offset ordinary income with passive losses. 

    However, once you're in the game for a while, you'll begin to see better tax shelter. 
    For example, whenever we exit an asset, the investors that are in for the long haul will reinvest their proceeds into the next acquisition whose paper losses typically offset the former gains and thus they are able to grow their wealth buckets at a faster rate - tax efficiently. (sort of like a 1031 but better)

    Hope that helps 

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  • Marek J.
    OP
    Chicago, IL · Member since 2017 · 19 posts · 2 votes
    6y
    Originally posted by @Andrew Hogan:

    Like Natalie and Basit pointed out, unless you qualify as a full-time real estate professional, you can't offset ordinary income with passive losses. 

    However, once you're in the game for a while, you'll begin to see better tax shelter. 
    For example, whenever we exit an asset, the investors that are in for the long haul will reinvest their proceeds into the next acquisition whose paper losses typically offset the former gains and thus they are able to grow their wealth buckets at a faster rate - tax efficiently. (sort of like a 1031 but better)

    Hope that helps 

     Hello what I meant is when for example make $150,000 at my W2 job, could i live on bare minimum and invest let say $100,000 into real estate per year and only be taxed on $50,000.   $150,000- 100,000 - $50,000 left over to live on. Now obviously my regular job taxes me each pay period but maybe id get a refund now since i Invested in real estate? Funding my business so I never realized the profit from my job, nor I consumed it, it was invested.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    no

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @Marek J.:
    Originally posted by @Andrew Hogan:

    Like Natalie and Basit pointed out, unless you qualify as a full-time real estate professional, you can't offset ordinary income with passive losses. 

    However, once you're in the game for a while, you'll begin to see better tax shelter. 
    For example, whenever we exit an asset, the investors that are in for the long haul will reinvest their proceeds into the next acquisition whose paper losses typically offset the former gains and thus they are able to grow their wealth buckets at a faster rate - tax efficiently. (sort of like a 1031 but better)

    Hope that helps 

     Hello what I meant is when for example make $150,000 at my W2 job, could i live on bare minimum and invest let say $100,000 into real estate per year and only be taxed on $50,000.   $150,000- 100,000 - $50,000 left over to live on. Now obviously my regular job taxes me each pay period but maybe id get a refund now since i Invested in real estate? Funding my business so I never realized the profit from my job, nor I consumed it, it was invested.

    That's a hard no. 

    You're taxed on money as you earn it.

    You did realize that income- you worked for it, and were paid for it. 

    You get to fund certain limits on retirement accounts through your employer that reduce your income- 

    But past that any income you literally receive- doesn't matter if you buy $100k of real estate, stocks, or kittens. It's taxable. 

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  • Michael King
    Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
    6y

    @Natalie Kolodij @Basit Siddiqi

    You mention $150K threshold on W2. I make more than that on my W2, but my wife makes nothing (stay at home mom) but we file married filing jointly. Is there a higher threshold in that instance. 

    Sorry @Marek J. I didn't meant to hijack your thread.

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  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @Michael King:

    @Natalie Kolodij @Basit Siddiqi

    You mention $150K threshold on W2. I make more than that on my W2, but my wife makes nothing (stay at home mom) but we file married filing jointly. Is there a higher threshold in that instance. 

    Sorry @Marek J. I didn't meant to hijack your thread.

     Nope still $150k unfortunately 

    But if your wife doesn't work and she's who manages your properties talk to your tax professional about potentially qualifying for RE professional status with the IRS. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    1Reply
  • Marek J.
    OP
    Chicago, IL · Member since 2017 · 19 posts · 2 votes
    6y
    Originally posted by @Natalie Kolodij:
    Originally posted by @Michael King:

    @Natalie Kolodij @Basit Siddiqi

    You mention $150K threshold on W2. I make more than that on my W2, but my wife makes nothing (stay at home mom) but we file married filing jointly. Is there a higher threshold in that instance. 

    Sorry @Marek J. I didn't meant to hijack your thread.


    ---

    Hello, so basically to do this I have to be a real estate professional ? Or have my wife be Re Professional. How would it look in that case ?

     Nope still $150k unfortunately 

    But if your wife doesn't work and she's who manages your properties talk to your tax professional about potentially qualifying for RE professional status with the IRS. 

    0Reply
  • Shane Smith
    Rental Property Investor · Fort Bragg, NC · Member since 2017 · 12 posts · 0 votes
    6y

    @Marek Javorek

    Correct me if im wrong tax experts, but a slight way around this would be to contribute max amount to an IRA and then take a loan (no interest or penalties) from said IRA. This would likely take a couple of years before you could really use that loan..

    Reference: I'm in the military and have a TSP. I contribute monthly, pre tax dollars. Then can take a 0% loan out. Because I'm federal its a pretty good deal on the repayment, only fee associated is $50 processing fee. I may be off the path that you were discussing though.

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  • Ruben Velazquez
    Investor · Lake Stevens, WA · Member since 2017 · 7 posts · 5 votes
    4y

    Hello, is this still applicable to 2022? I would imagine it would adjusted for inflation, right? (Unless one is a Real Estate Pro, which I can't do that just yet). Thanks for the help! 

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