new york, NY · Member since 2013 · 11 posts · 1 vote
My wife and I are new to the forum and to real estate investing. We are fortunate to have joint income in the $350k range combined.
We have read a lot of various articles and such but have a BIG question...
Based on our income level, can we still qualify for real estate deductions on our taxes and how about claiming real estate losses? We set up an LLC to act as the property manager to have expenses flow through the LLC.
If your AGI is over $150K, you can't take any of the "special allowance" that lets you offset other income with passive losses from rentals. The exception would be if you're a "real estaet professional". To qualify, you need to spend at least 750 hours a year doing real estate stuff AND spend more time doing that than anything else. So, if you have a full time job, 2080 hours per year, you would need to spend 2081 hours doing real estate stuff.
Now, you can still offset the income from the rentals with the passive losses. What that really means is that you deduce the depreciation from the rental income. And all other expenses, but those are all real cash out the door. So, you may not have much if any taxes from the rental.
If you do end up with a net loss, its "disallowed" and accumulates. You can use it to offset some of the gain when you sell a rental.
All that said, profitable rentals actually produce taxable income, not losses. This idea of passive losses offsetting other income is often used to put some lipstick on a piggy rental.
If your AGI is over $150K, you can't take any of the "special allowance" that lets you offset other income with passive losses from rentals. The exception would be if you're a "real estaet professional". To qualify, you need to spend at least 750 hours a year doing real estate stuff AND spend more time doing that than anything else. So, if you have a full time job, 2080 hours per year, you would need to spend 2081 hours doing real estate stuff.
Now, you can still offset the income from the rentals with the passive losses. What that really means is that you deduce the depreciation from the rental income. And all other expenses, but those are all real cash out the door. So, you may not have much if any taxes from the rental.
If you do end up with a net loss, its "disallowed" and accumulates. You can use it to offset some of the gain when you sell a rental.
All that said, profitable rentals actually produce taxable income, not losses. This idea of passive losses offsetting other income is often used to put some lipstick on a piggy rental.
"All that said, profitable rentals actually produce taxable income, not losses."
Except that in NY City, there are games played by property buyers around the rent-control laws. So properties are often purchased with below-market rents that are currently capped, with the expectation of making improvements and doing other things to permit the rents to rise to market over time. So these properties can definitely create sizable tax losses for awhile.
So in other words, expenses related to land-lording and depreciation can offset GROSS rental income (not net income), correct? Any loss I have gets carried over and can be used to offset gains when the property is sold (generally speaking)?
Net rental income is the rent you actually collect, less the actual expenses (interest, taxes, insurance, maintenance, property management, pest control, snow removal, laywers, CPAs, etc) and less depreciation. The improvements themselves, anything you spend getting it ready to rent, and big capital items have to be depreciated over multiple years.
If net rental income is positive, you pay tax on it at your ordinary rate.
If its negative, and with your income and if you're not a RE pro, then it becomes a carryforward loss. If you do have positive years in the future, as David Beard says, then you can use those losses to offset future income. And you use it to reduce the gain when you sell.
If you have multiple rentals and you sell one, you can use all the carry forward losses from all properties against the gain on that one sale.
I do agree there are other strategies besides immediate cash flow from a rental.
We are in your exact shoes.
And the above posters are right on the money.
Depreciation helps with passive income on my rental.
We can't deduct expense bc of high income.
I keep a log of my hours and miles, with the real state professional I can do a schedule c.
I deduct expense and depreciation on my rentals..if still positive I have to pay the different state taxes bc my units are in 3 states.
I just passed my realtor exam...and after talking with my CPA, being a independent contractor I can deduct "more" of my real estate expense from realtor income
My hubby is employee and not independent contractor so our deduct is NIL/minimum right now.
This year I have expenses for looking and investing for an investor, none of which I can deduct if I Weren't taxed as RE professional in eyes of IRS
I'm not CPA and this is my rough understanding from mtg with CPA.
Highly recommend you find one before your jump in at our income lvl.
I have llc too...
Thanks so much for bringing this up, especially right now! We are also in the exact same situation. Our income just tipped over the limit this year. Last year we got a deduction of $900 based on maybe $10K in losses, but this year it's zero.
So, I guess it's good news that the losses protect the rents from being viewed as incremental taxable income am I right on that? I've been thinking about some solutions:
1) Putting our investment properties (three SFRs) into a new legal structure, like a family trust. I expect that this will help for legal protection, but will that have any tax benefits?
2) File as "married filing separately" and put all of the property in my wife's name, as she makes much less than the $150K threshold. Will that make a difference?
Finally, has anyone read the Kraemers' "Real Estate Investors Tax Strategy Guide"? I'm just starting, but I expect I'll get better answers right here! :)
Jon Holdman is right. Your management company will not help as the nature of the property management company means that expenses are ultimately passed through to the properties.
You would need to be a real estate professional in order to qualify. That means:
1. You spend over 750 hours in the real estate trade or business. Which is difficult if you don't have many rentals.
2. You spend more time involved in the real estate trade or business than any other operations.
The losses will accrue until the year in which you sell the property allowing you to take advantage of the losses that will hopefully offset a gain on the sale.
Charles Haas,
1. A trust will not assist you in being able to deduct those losses. It still passes through to the same place subject to the same rules.
2. Married filing separately will not assist as your deduction would still be limited.
"Married persons filing separate returns who lived with their spouses at any time during the year are not eligible for the special allowance." http://www.irs.gov/instructions/i8582cr/ch02.html#d0e1109
Feel free to ask your questions here. We are always happy to help.