San Francisco, CA · Member since 2015 · 10 posts · 1 vote
When listening to the BP podcasts I often hear about different tax benefits such as:
Itemized deductions related to acquiring/managing properties
Home depreciation tax write off
Do these things lower the tax bracket of the income I get on my W4? Or do they lower the tax bracket of only capital gains derived from the real-estate itself? Can real-estate tax deductions be applied to the income I receive from my full-time job?
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y
@Anthony Z. first off, your W4 is the form in which you determine the number of allowances you should claim so that your company's payroll department can then determine how much tax should be withheld from your paycheck.
Your W2 is the form you receive at year end from the company which provides an earnings summary. You use this form to report your tax position to the IRS and state governments. It's common for folks to refer to their "W2 job" or "W2 income" when speaking about their full time job.
Tax deductions from investing in real estate may or may not lower your total taxable income. If you buy a property that performs well, it's likely that it will create net taxable income which will increase your tax liability. If you purchase a property that performs okay or required substantial rehab/improvements on the front end, or is an appreciation play rather than a cash flow play, it's likely the property will provide for a passive loss.
Passive losses can offset your W2 income, or any other income for that matter, up to a certain extent. You are allowed to claim a passive loss up to $25k on your return as long as your adjusted gross income (AGI) is less than $100k (technically it's in relation to your MAGI but let's keep it simple for now). If your AGI is between $100k and $150k, the passive loss allowance is phased out. You cannot claim a passive loss if your AGI is above $150k unless you are a real estate professional which requires an entirely separate post. If your passive loss is phased out, you don't lose it. Instead it's carried over year after year until it can be offset with real estate income.
So can real estate deductions offset your day job income? Yes, certainly. Pending your AGI is less than $150k. Otherwise it's unlikely until you've built a large portfolio and can qualify as a real estate pro.
Will your W2 income increase or decrease each month? Nope. Real estate won't affect that unless your passive losses are substantial enough to warrant adjusting your W4, which will then change you monthly paycheck but not your overall total (unless you get a raise!).