Need to show 250K loss. Strategies?

Investor · Seattle, WA · Member since 2015 · 33 posts · 4 votes

I'm doing tax planning for the next year. Looking for strategic guidance from an investments standpoint (of course I'll work with my CPA on the details)-

1. My individual taxable income in 2021 (after all deductions) = 250K

2. Cash $1M (for investments this year)

3. I need to create a loss from real estate investments of 250K to pay zero taxes in my personal 2021 filing.

Here are some questions I've been pondering over-

A. What's the value of the rental RE portfolio I need to buy to create this loss?

B. What's ideal leverage will accomplish this goal? Any other accounting guidelines such as depreciation methods etc. that could help?

C. Any other RE/non-RE ideas which can help me accomplish the above goal.

Thanks!

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Rick Ortiz

Rental Property Investor · Philadelphia, PA (19148) · Member since 2020 · 38 posts · 39 votes

@Jay Pillalamarri

Send me $250k. I will lose it for you. Win ..win for both of us

13 Reply

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Jim K.
Rental Property Investor · Charlotte, NC · Member since 2017 · 271 posts · 259 votes
5y
@Jay Pillalamarri
Hi Jay. It sounds like you are looking for accelerated depreciation. You can take it after getting a cost segregation study completed on your property.
There are pros and cons you should research and understand. We just completed 7 of them a few months ago. We averaged 24% year 1 depreciation across the houses.
If you had the same result, you’d need $1M worth of property. Leverage is up to you and doesn’t impact the write offs with accelerated depreciation. The only direct impact it has on taxes is being able to write off the interest paid annually.
6 Reply
Christopher Smith
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
Ideally you should base your goals on making economic profits, not generating tax losses. Tax benefits for the most part take care of themselves if you have at least a room temperature IQ. Building a truly profitable business on the other hand takes enduring skill, patience intelligence and effort.
9 Reply
Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
5y
Originally posted by @Jay Pillalamarri:
I'm doing tax planning for the next year. Looking for strategic guidance from an investments standpoint (of course I'll work with my CPA on the details)-

1. My individual taxable income in 2021 (after all deductions) = 250K

2. Cash $1M (for investments this year)

3. I need to create a loss from real estate investments of 250K to pay zero taxes in my personal 2021 filing.

Here are some questions I've been pondering over-

A. What's the value of the rental RE portfolio I need to buy to create this loss?

B. What's ideal leverage will accomplish this goal? Any other accounting guidelines such as depreciation methods etc. that could help?

C. Any other RE/non-RE ideas which can help me accomplish the above goal.

Thanks!
Yes, this can be achieved depending on the type/class of assets you will acquire or already have. But you have to be careful with the Passive Activity Loss rules if you or your spouse is not qualified as the real estate professional.
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1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
5y
Primarily a zoning question. Start a storage location with just cargo containers. Buy 80 8 by 20 units. Write off the containers, fence, security and road development. Be about a $300,000 investment not including the land.
1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
5y
Primarily a zoning question. Start a storage location with just cargo containers. Buy 80 8 by 20 units. Write off the containers, fence, security and road development. Be about a $300,000 investment not including the land.
0 Reply
Rick Ortiz
Rental Property Investor · Philadelphia, PA (19148) · Member since 2020 · 38 posts · 39 votes
5y
@Jay Pillalamarri
Send me $250k. I will lose it for you. Win ..win for both of us
13 Reply
Keri Carpenter
San Francisco, CA · Member since 2017 · 26 posts · 38 votes
5y
I make similar at my W2 and I can't take any losses on my real estate portfolio because I make too much to take a loss on real estate. Business losses, however, are unlimited. But the bite that I've found is that, unlike real estate "losses", business losses tend to be real money losses and, from experience, I wouldn't suggest it.
3 Reply
Francis Louis Vogel Jr
Banker · Saint Clair Shores, MI · Member since 2011 · 131 posts · 53 votes
5y
Enjoyed to post, great information.
0 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y
@Jay Pillalamarri

First, I cannot support your goal of paying zero taxes. I much prefer the primary goal being either generating cash flow or, better yet, building long-term equity in assets. Whatever lets me accomplish this is what I would pursue. Reducing taxes is secondary. Dropping them to zero is a poor goal either way, because at some point the effort is no longer worth the small savings.

Don't get me wrong, I'd love to pay zero taxes if it's possible. I just would not be choosing my business strategies based on this goal. Once I chose a strategy, then I'll do my best to reduce taxes. If I manage to drop them to zero - great. If not - still no problem if I'm accomplishing my cash flow or asset accumulation goals.

Next. If you're single and have a full-time $250k job, you cannot offset this W2 income with rental losses. Not allowed by law. No matter how much real estate you buy and what strategies you apply. If you make $250k from your business, such as being a consultant - same problem basically, with some twists.

To be able to offset your $250k income with rentals, either your $250k needs to be self-employment income from real estate, like being a realtor, or you need to be married to someone who is involved in real estate basically full-time and qualify as a Real Estate Professional.

In short, you're asking the wrong questions and getting suggestions that are probably not helpful.
4 Reply
Matthew M.
Los Angeles, CA · Member since 2018 · 86 posts · 86 votes
5y
@Jay Pillalamarri typically you can’t deduct passive losses from your active income. There are some thresholds below which you can through real estate (approximately $150k) but you are passed that threshold to my knowledge. Unless you are a full time real estate professional in which case you can deduct from your active income. Obligatory this is not tax advice and I am not a cpa.
0 Reply
Susan Wang
Rental Property Investor · Member since 2021 · 17 posts · 10 votes
5y
Originally posted by @Michael Plaks:
@Jay Pillalamarri

First, I cannot support your goal of paying zero taxes. I much prefer the primary goal being either generating cash flow or, better yet, building long-term equity in assets. Whatever lets me accomplish this is what I would pursue. Reducing taxes is secondary. Dropping them to zero is a poor goal either way, because at some point the effort is no longer worth the small savings.

Don't get me wrong, I'd love to pay zero taxes if it's possible. I just would not be choosing my business strategies based on this goal. Once I chose a strategy, then I'll do my best to reduce taxes. If I manage to drop them to zero - great. If not - still no problem if I'm accomplishing my cash flow or asset accumulation goals.

Next. If you're single and have a full-time $250k job, you cannot offset this W2 income with rental losses. Not allowed by law. No matter how much real estate you buy and what strategies you apply. If you make $250k from your business, such as being a consultant - same problem basically, with some twists.

To be able to offset your $250k income with rentals, either your $250k needs to be self-employment income from real estate, like being a realtor, or you need to be married to someone who is involved in real estate basically full-time and qualify as a Real Estate Professional.

In short, you're asking the wrong questions and getting suggestions that are probably not helpful.
What about with STR? Can't he shelter his income even without REPs status as long as he shows enough participation hours?

3 Reply
Tushar P.
Member since 2019 · 332 posts · 171 votes
5y
@Jay Pillalamarri sooner or later you will realize that Uncle Sam is not a dummy and he is going to win every time. Even if you ‘defer’ the taxes by buying junk and taking accelerated depreciation, Uncle Sam will get you in the long run. I can think of 2 ways to pay zero taxes: prepay everything, or die soon after taking accelerated depreciation (via buying junk).

Better if you focus on increasing your income rather than thinking of paying zero taxes.
0 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y
Originally posted by @Susan Wang:
Originally posted by @Michael Plaks:
@Jay Pillalamarri

What about with STR? Can't he shelter his income even without REPs status as long as he shows enough participation hours?

Yes, he might be able to do that. It's not that easy, however, to satisfy the material participation requirement with STRs for someone with a full-time W2 job. Possible in the right situations.
Important to notice, however, that STRs do not normally generate substantial losses (if any) except for the first year when you can take major depreciation with furnishings and cost seg.
2 Reply
Yonah WeissPro Member
Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
5y
Originally posted by @Tushar P.:
@Jay Pillalamarri sooner or later you will realize that Uncle Sam is not a dummy and he is going to win every time. Even if you ‘defer’ the taxes by buying junk and taking accelerated depreciation, Uncle Sam will get you in the long run. I can think of 2 ways to pay zero taxes: prepay everything, or die soon after taking accelerated depreciation (via buying junk).

Better if you focus on increasing your income rather than thinking of paying zero taxes.

Why do you assume the only way to 'defer' taxes (as you say) is by buying junk? I agree with you and @Michael Plaks that one should focus more on increasing income and cash-flow more than on decreasing taxes, but tax strategy certainly should not be overlooked or taken lightly.
If I was in the OPs situation with such a high tax bill, I would also be looking to use strategies like cost seg to save 6 figures in taxes, and use that money to buy more income producing property. Keep that method going each year as much as possible, so even if several years down the road when you sell a property and have a tax bill, it will be far less of a hit, because you have used the tax free money to compound your wealth over the years. What that has to do with 'junk properties', feel free to explain yourself.
1 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
5y
losses don't really go away, assuming your property appreciates and you may want to sell, banking your losses can be a very good idea. Cost Seg, even if you can't "use" the accelerated depreciation immediately, will let you do that
2 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y
Originally posted by @Jonathan R McLaughlin:
losses don't really go away, assuming your property appreciates and you may want to sell, banking your losses can be a very good idea. Cost Seg, even if you can't "use" the accelerated depreciation immediately, will let you do that

Banking losses with cost seg almost never helps. Such losses normally have to wait until you sell the property, at which point depreciation recapture cancels the cost seg benefits.
2 Reply
Tushar P.
Member since 2019 · 332 posts · 171 votes
5y
Originally posted by @Yonah Weiss:
Originally posted by @Tushar P.:
@Jay Pillalamarri sooner or later you will realize that Uncle Sam is not a dummy and he is going to win every time. Even if you ‘defer’ the taxes by buying junk and taking accelerated depreciation, Uncle Sam will get you in the long run. I can think of 2 ways to pay zero taxes: prepay everything, or die soon after taking accelerated depreciation (via buying junk).

Better if you focus on increasing your income rather than thinking of paying zero taxes.

Why do you assume the only way to 'defer' taxes (as you say) is by buying junk? I agree with you and @Michael Plaks that one should focus more on increasing income and cash-flow more than on decreasing taxes, but tax strategy certainly should not be overlooked or taken lightly.
If I was in the OPs situation with such a high tax bill, I would also be looking to use strategies like cost seg to save 6 figures in taxes, and use that money to buy more income producing property. Keep that method going each year as much as possible, so even if several years down the road when you sell a property and have a tax bill, it will be far less of a hit, because you have used the tax free money to compound your wealth over the years. What that has to do with 'junk properties', feel free to explain yourself.

Of course good tax saving strategies should be pursued. The op is asking how to pay ‘zero’ taxes. As for junk, that will provide the most loss compared to a good investment that may produce profits even after accounting for depreciation loss. Just like how earning very little makes the tax bill zero.
0 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
5y
@Michael Plaks I figured he wasnt able to take against other income, and a cost seg that produced bonus depreciation etc would still help. Rate is 25% on recapture? You still get 75% of the losses against gain.
Real question as I know this is your area, is this a tangible (even if somewhat diluted) benefit given the other alternatives?

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y
Originally posted by @Jonathan R McLaughlin:
@Michael Plaks I figured he wasnt able to take against other income, and a cost seg that produced bonus depreciation etc would still help. Rate is 25% on recapture? You still get 75% of the losses against gain.

This is getting into technical details. 25% recapture is for the regular depreciation. Accelerated depreciation from cost segregation works differently. You may not get any benefit from it all, and may get a little bit. Considering the cost of the cost seg study, it's almost never a good idea to do cost seg when your losses are locked up. Your 75% idea is 95-100% off.

2 Reply
Bonnie Griffin KaakePro Member
Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
5y
@Michael Plaks and @Jay Pillalamarri Cost segregation is an excellent way to defer taxes and recommended by the American Institute of CPAs (AICPA). The recapture is not an issue since you are paying back with dollars worth less (time value of money) and your rarely pay back what you got up-front anyway. The value of the items you took accelerated depreciation on simply are not worth what they were when you did the cost seg. The CPAs I work with know how to justify the difference upon sale and then the increase goes to your basis which is at capital gains rates, not your marginal tax rate. There are a couple reasons you would not want to do a cost seg...you pay no taxes or your going to sell within a year or two.
If you own multiple "passive" properties, be sure to have your tax professional group them so that you can use any passive losses against any passive gains. The tax pros on here can address this better than I can.
I know of one other way to put that $250k to use and get a guaranteed 5% return on it year after year. If interested, contact me.
[email protected]303-475-4459
1 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y
Originally posted by @Bonnie Griffin Kaake:
Cost segregation is an excellent way to defer taxes and recommended by the American Institute of CPAs (AICPA). The recapture is not an issue since you are paying back with dollars worth less (time value of money) and your rarely pay back what you got up-front anyway.

Yes, it is an excellent way - when appropriate.
Your argument does not apply to the situation I was commenting on: specifically, when your losses are locked by passive activity loss rules. These losses will not be unlocked until the year of sale. So both the depreciation deduction and depreciation recapture will happen in the SAME year. There is no deferral and no time value of money involved here.
2 Reply
Susan Wang
Rental Property Investor · Member since 2021 · 17 posts · 10 votes
5y
Originally posted by @Michael Plaks:
Originally posted by @Susan Wang:
Originally posted by @Michael Plaks:
@Jay Pillalamarri

What about with STR? Can't he shelter his income even without REPs status as long as he shows enough participation hours?

Yes, he might be able to do that. It's not that easy, however, to satisfy the material participation requirement with STRs for someone with a full-time W2 job. Possible in the right situations.
Important to notice, however, that STRs do not normally generate substantial losses (if any) except for the first year when you can take major depreciation with furnishings and cost seg.

Agree regarding the first year tax benefits. One strategy is to get a STR towards the end of the year to make sure your material participation hours (100) are greater than any other person (ie. cleaners). It is easier to control hours when you have limited months, get your tax benefits, and then can switch over to PM next year since the losses are mainly for first year. Rinse and repeat. This seems like the easiest way for a full-time W2 employee to enjoy some of the extra tax benefits to shelter active income without getting REPs.

1 Reply
Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
5y
@Susan Wang
If they want to own a business, that is :) Unlike regular rentals which is an investment, STRs are a business, with ongoing hassles.
1 Reply
Tushar P.
Member since 2019 · 332 posts · 171 votes
5y
Originally posted by @Susan Wang:
Originally posted by @Michael Plaks:
Originally posted by @Susan Wang:
Originally posted by @Michael Plaks:
@Jay Pillalamarri

What about with STR? Can't he shelter his income even without REPs status as long as he shows enough participation hours?

Yes, he might be able to do that. It's not that easy, however, to satisfy the material participation requirement with STRs for someone with a full-time W2 job. Possible in the right situations.
Important to notice, however, that STRs do not normally generate substantial losses (if any) except for the first year when you can take major depreciation with furnishings and cost seg.

Agree regarding the first year tax benefits. One strategy is to get a STR towards the end of the year to make sure your material participation hours (100) are greater than any other person (ie. cleaners). It is easier to control hours when you have limited months, get your tax benefits, and then can switch over to PM next year since the losses are mainly for first year. Rinse and repeat. This seems like the easiest way for a full-time W2 employee to enjoy some of the extra tax benefits to shelter active income without getting REPs.

I think this strategy will definitely lower the taxes, due to actual losses incurred from inefficient running of the STR business and actual lost income resulting from not being able to properly focus on the W2 job. Unless someone is in a very lucrative STR market and has a very reliable pm.
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