using realestate as tax reduction strategy

3 Replies

Hi everyone, 

Thank you in advance for the replies. I have been learning and listening about realestate investing for some time now and have questions about how real-estate can be used to reduce taxable income. Lets say that one has high income from primary occupation (its a non real-estate 1099 income). Is there a way to use investment real-estate to reduce taxable income from your primary job, without getting a real-estate professional status. I understood that depreciation from rental property can only offset income from that property and can't be used against non passive income source (plz correctly if I am wrong), especially if your active income is above 150k/year? Or did I get this info wrong? It seems that everywhere I look in the media the "experts" say that a purpose of a business is to use the income to buy real-estate and then use the depreciation to offset taxable income from that business. Does that apply to the scenario above or does it only apply to business associated with buying/flipping/managing real-estate? 

Thanks in advance for any input. 


Val 

@Valentine Sviatocha

There are other things to consider such as exit opportunities.
Real estate provides great exit opportunities for those who want to dispose of their asset and pay no tax.

Furthermore, based on your analysis, rental income will be better than other investment types(Interest income + Dividend income) since the latter will not be eligible to be sheltered.

Originally posted by @Valentine Sviatocha :

Hi everyone, 

Thank you in advance for the replies. I have been learning and listening about realestate investing for some time now and have questions about how real-estate can be used to reduce taxable income. Lets say that one has high income from primary occupation (its a non real-estate 1099 income). Is there a way to use investment real-estate to reduce taxable income from your primary job, without getting a real-estate professional status. I understood that depreciation from rental property can only offset income from that property and can't be used against non passive income source (plz correctly if I am wrong), especially if your active income is above 150k/year? Or did I get this info wrong? It seems that everywhere I look in the media the "experts" say that a purpose of a business is to use the income to buy real-estate and then use the depreciation to offset taxable income from that business. Does that apply to the scenario above or does it only apply to business associated with buying/flipping/managing real-estate? 

Thanks in advance for any input. 


Val 

There are some loop holes that don’t require RE pro status but can use the losses without limitation under passive activity rules. Please talk to your tax advisor.

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Your income needs to be below $100k to use the full $25k/annual loss deduction- it phases out and then at $150k it isn't allowed at all any more and carries forward. 

If you're over that amount I tell peopple to consider the potential of earning MORE tax free, vs. reducing the tax on what you currently own. 

If you stack up $5k of losses annually for 10 years. Thenin 10 years go to sell that rental for a profit of $50k - you have $50k of losses to offset that gain and zero it out essentially. 

There is a lot more to it but there are lots of ways to set up real estate to help with your tax burden.