How to use real estate to offset personal income

Question

Hi all,

I have a question that day traders may come across. This is my first year day trading and although I did very well I didn’t plan for doing taxes (did not elect trader status on time). Now, at the end of the year I am scrambling to find a way to offset that income and real estate investment came to mind.

What does this scenario look like to you:

1. $300,000 in income from w2 and day trading (day trading $170,000).

2. Buying real estate last minute (closing by end of October latest) at $500,000.

3. Renting 7 days or less and qualifying for material participation. Not living in the property at any time.

4. Plan on doing cost segregation study if it can reduce tax liability for ordinary income.

Is this a lost cause or are there ways to shape this into something useful with the right professional?

Wayne Brooks · Answer

@Dijana Aleksic Won’t happen.

-for passive losses from rental income, you can’t use it when your income is over $150k

-for the losses to be from Active activities and be able to be applied to an income over $150k,  you’d need Real Estate Professional status, which requires 750 hours/year involved in real estate activities.

Ashish Acharya · Answer

Yes,t is possible but there are other complications.

Bruce D. Kowal · Answer

One last thought, have you thought about moving to a State with zero individual income tax?   Texas, Tennessee, New Hampshire, Florida?

Bruce D. Kowal · Answer

if you are doing that well day trading, why on Earth do you want to get into real estate?  In day trading you get return OF investment and return ON investment immediately.  Try that with real estate.  And at end of day, you have all your capital back, no matter what event may happen.

As for electing Trader status, vs. Investor, you will have a hard time if you are getting a W2.  And realistically, the only advantages are the ability to deduct current losses as ordinary income.  But you are making money, so there is no advantage.  The other advantage is the ability to deduct operating expenses?  What expenses?  Pro-rate office at home?

Back to your day trading success, if you are doing that well, why not sell your expertise?  Start an online subscription service where traders can see your trades in real time?  I 'd pay . . .,

As for real estate, you have a nice W2 and day trade income, why mess up your life?  If you like real estate for the long term, by an ETF invested in REITS, such as Vanguard and/or Fidelity.

As the say in Texas, "if it ain't broke, don't fix it!

Bruce D. Kowal · Answer

There are two avenues to fully using a loss from rental real estate to offset ordinary income, such as your W2.  The Rental Real Estate loss allowance and being a Qualified Real Estate Professional.  You make too much money to qualify for the Rental Real Estate loss allowance.  Because you are specifically interested in short term rentals, HR Block publishes a very detailed guide.  Air BNB Host Reporting Guide

After reading this guide, I suggest you make an appointment with your local HR Block office and discuss your concerns with them.

Dijana Aleksic · Answer

I have been searching for real estate CPAs in the last two days and will have a consultation with one today. Clarification is needed as the responses on here don’t match what I have read elsewhere.

Julio Gonzalez · Answer

@Dijana Aleksic Your plan could work but there's a lot of missing details to determine that. Do you have a CPA that you're working with? I'd definitely recommend discussing it with them and if you don't have one and are interested in investing in real estate, I'd suggest looking for one that specializes in real estate taxation. Cost segregation is most beneficial if you have REPS status, but you could still benefit from it depending on the income you could offset the passive losses against.

Wale Lawal · Answer

@Dijana Aleksic

Passive income real estate is known as one of the best ways to gain an additional source of revenue, attain security in retirement, and ultimately design a roadmap to achieving financial freedom. However, passive income real estate investing is not necessarily the right fit for every investor.

Passive income real estate is a strategy through which an investor can create earnings without having to be actively involved. The term “passive income” is used loosely, as the level of required activity and involvement varies based on the investment type. Some common examples of this real estate income include rental properties or earnings made from investment portfolios.You should get adequate knowledge of real estate and strategies you are planning to apply.Also explore various financing and partnering options.You can start by joining local real estate clubs, attending meetups and connecting with local agents and investors.Do a thorough local market research and analysis.A local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.All the best!

Dijana Aleksic · Answer

If you don’t mind sharing, what are some possible complications that come to mind. My main concern is that the depreciation will not be able to be taken fully since there are only a few months left in the year. Am I missing something obvious? Thanks much!

Dijana Aleksic · Answer

Losses can become active even when you are not classified as a real estate professional. This would be a short term rental 7 days or less and actively managed with services by me. That would qualify it as a business rather than a rental passive income.

How to use real estate to offset personal income

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