Earnings too high to claim passive losses?

Rental Property Investor · Member since 2019 · 26 posts · 7 votes

so what happens if you have lots of passive losses on real estate - but your active income is over 150k? is there a way to still claim those loses if you are a full time employer in healthcare.

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

Starting an LLC won't make your losses available.

Passive losses are treated as such no matter where they generate- so if your LLC genrates a passive loss and it flows to your 1040 via the K1- it's still limited there. This doesn't change any thing on that side.

Your CPA gave you bad advice- the LLC isn't allowing your passive losses to reduce your ordinary income so it didn't change this circumstance.

If your Income is over $150k you have a few options

-See if you or your spouse can qualify as RE pro

-Loss bank- those losses get saved up, use to offset a gain from a trade, trade into more profitable properties, sell stocks, ect

- Generate passive income which passive losses can be utilized against .

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Michael Bishop
United States · Member since 2015 · 401 posts · 394 votes
6y
@Loic Assobmo it's more about what you're offsetting it against than it is about what you earn. Typically, passive losses have to be offset against passive gains. There are accredited investors ($200K+ income) offsetting the passive gains in their portfolio with things like K1 losses from syndications or other similar investments.
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Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
I make over 200K from my full time job. Spoke to my CPA about. He told me to start an LLC. I started an one...now I can claim all of my losses. Done deal,
5 Reply
Loic Assobmo
OP
Rental Property Investor · Member since 2019 · 26 posts · 7 votes
6y
@Brittany R. Really ? Can you please explain a little of how that works out? Are you able to claim losses over 50k?
0 Reply
Loic Assobmo
OP
Rental Property Investor · Member since 2019 · 26 posts · 7 votes
6y
@Michael Bishop so you’re saying you’re saying if one property has net positive and another one has net negative you can use that to offset the positive. I’m sorry please give an example so I can better understand.
0 Reply
Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
@Loic Assobmo I'm sorry, I didn't explain. I meant that now I CAN have deductions from the losses bc I have them in my LLC, not in my name. I'm not sure what the limit is now.
0 Reply
Michael Bishop
United States · Member since 2015 · 401 posts · 394 votes
6y
@Loic Assobmo it depends on your situation, if you're actively managing the properties, etc. It has to be purely passive to offset each other. I'm no CPA, I just know that it CAN be done as I know folks doing it.

@Brittany R., curious, are the losses you're claiming from a portfolio you manage and are actively involved in, or are they from passive investments like syndication, NNN, etc.?
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Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
They are my properties and I manage them along with the other members of my LLC. Every penny spent or received in relation to the properties, flow through the business account and records are kept of everything involving the properties.
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Starting an LLC won't make your losses available.
Passive losses are treated as such no matter where they generate- so if your LLC genrates a passive loss and it flows to your 1040 via the K1- it's still limited there. This doesn't change any thing on that side.
Your CPA gave you bad advice- the LLC isn't allowing your passive losses to reduce your ordinary income so it didn't change this circumstance.
If your Income is over $150k you have a few options
-See if you or your spouse can qualify as RE pro
-Loss bank- those losses get saved up, use to offset a gain from a trade, trade into more profitable properties, sell stocks, ect
- Generate passive income which passive losses can be utilized against .
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
Website View Page
14 Reply
Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Brittany R.:
@Loic Assobmo I'm sorry, I didn't explain. I meant that now I CAN have deductions from the losses bc I have them in my LLC, not in my name. I'm not sure what the limit is now.

Entirely wrong. You're CPA is setting you up for failure and an audit.
[email protected]224-381-2660
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Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
@Brittany R.
Do you/other members of your LLC take a salary from the LLC and pay employer & employee taxes, or is all income from the LLC passive income?
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Brittany R.:
I make over 200K from my full time job. Spoke to my CPA about. He told me to start an LLC. I started an one...now I can claim all of my losses. Done deal,

It can only offset passive gains the net is zero it cannot offset your wages without being considered a real estate professional.
[email protected]224-381-2660
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Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
@Natalie Kolodij
I am at the cusp of becoming an ‘Active’ real estate professional, in order to be able to offset what currently is passive RE losses against my spouse’s active w2 income. I actively manage my rental and easily can document the 750 hours a year in such activities. My question is, does it make any RE rental income ‘active’’ and thereby subject rental income to employer/employee taxes?
The rental is owned by a single-member LLC which is simply a pass through to our personal tax returns.
0 Reply
Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
@Steven Hamilton- I didn’t say that it would offset my wages... Maybe I didn’t make myself clear. I can have losses on my business taxes..still getting the benefits of losses. versus if I didn’t create the business, then I would be only doing my personal taxes and thus not able to claim as much loss.
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Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
@Natalie

@Natalie Kolodij your last statement...isn’t that what my passive income Is? Passive income with passive losses? Hmm.
0 Reply
Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
@Natalie Kolodij I didn’t say that it reduces my income...per say...but my income from my rentals are lessened bc I haven’t made as much due to the losses, ex.repairing the gutters and such.
0 Reply
Hai Loc
Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
6y
Originally posted by @Brittany R.:
@Natalie Kolodij I didn’t say that it reduces my income...per say...but my income from my rentals are lessened bc I haven’t made as much due to the losses, ex.repairing the gutters and such.

Why would you even bring this up when its not relevant to the OPs questions
3 Reply
Brittany R.
Investor · NY · Member since 2020 · 57 posts · 44 votes
6y
@Hai LocI’m responding to the critics. Anyways, goodbye. I’m not a tax professional like they are. Please feel free to take their advice and not mine. No hard feelings. Goodbye.
1 Reply
Alina Trigub
Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
6y
@Loic Assobmo

While you received great information from @Natalie Kolodij, I'd say a lot depends on your personal case which must be discussed in details with your CPA. A general rule of thumb, if you're above threshold then passive losses can only be offset by passive income. You can typically generate both by having a number of various investments spread out over time in a way that allows to take on Depreciation up front and then for it to gradually subside and sell the asset. Again, I'm generalizing here and this is not an advice, but simply my opinion. Speak with your tax accountant on how to best strategize your personal situation.
Best!
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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Jai Reddy:
@Natalie Kolodij
I am at the cusp of becoming an ‘Active’ real estate professional, in order to be able to offset what currently is passive RE losses against my spouse’s active w2 income. I actively manage my rental and easily can document the 750 hours a year in such activities. My question is, does it make any RE rental income ‘active’’ and thereby subject rental income to employer/employee taxes?
The rental is owned by a single-member LLC which is simply a pass through to our personal tax returns.

Nope it remains passive income- but you're no longer subject to those limits.

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Kolodij Tax & Consulting
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1 Reply
Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Brittany R.:
@Natalie Kolodij I didn’t say that it reduces my income...per say...but my income from my rentals are lessened bc I haven’t made as much due to the losses, ex.repairing the gutters and such.

So that's the whole situation OP is asking about -
You get to deduct the exact same deductions against your rentals whether they are in your personal name, a single member llc, or multi member LLC.
So if you kept your rental in your name - tax impact would be the same as now.

Rental in your LLC= generates a loss
IF the rental was still in your name it would still generate the same loss
Your CPA created no tax/savings benefit by utilize an LLC- your audit risk is arguably lower. But no additional deductions are allowed from it.
The discussion here is if your income is over $150k- you can't "use" those losses. You've already wiped out your rental income, that's how the loss came to be- but the remainder of it can't offset any of your other income. That's the issue OP is running into and trying to solve.
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
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1 Reply
Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
If I knew the benefits of qualifying as an 'active' real estate professional while my spouse continues her W2 income, I would have benefited immensely - both strategically to build wealth, as well as annually when we file our tax returns. My CPA who files our taxes every year is well-versed with real estate and the tax code, but he on his own is not going to suggest strategic changes to minimize our taxes.

I believe that, similar to how we require mentors for our real estate journey's, we should seek and pay for proactive tax guidance which has the potential to maximize our time on Earth as we try to build up wealth.
1 Reply
Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
If I knew the benefits of qualifying as an 'active' real estate professional, while my spouse continues her W2 income, I would have benefited immensely, both strategically to build wealth, as well as annually when we file our tax returns. My CPA who has files our taxes every year is well-versed with real estate and the tax code, but he on his own is not going to suggest strategic changes to minimize our taxes.

I believe that, similar to how we require mentors for our real estate journey's, we should seek and pay for proactive tax guidance which has the potential to maximize our ability to build wealth.
0 Reply
Nicholas Bolcon
Coventry, RI · Member since 2018 · 73 posts · 39 votes
6y
To clarify for everyone who seems confused, I believe the OP is talking about the fact that if you make under a certain amount of MAGI (may be 150k not sure but I thought it was 115k) you can deduct up to a certain amount of passive losses from your regular income. So if you are making under a certain amount you do have the option to not solely offset passive income with passive losses. This is a question that actually could affect my taxes this year, I'm not 100% sure yet which is why I will ask the accountant.
0 Reply
Loic Assobmo
OP
Rental Property Investor · Member since 2019 · 26 posts · 7 votes
6y
Originally posted by @Nicholas Bolcon:
To clarify for everyone who seems confused, I believe the OP is talking about the fact that if you make under a certain amount of MAGI (may be 150k not sure but I thought it was 115k) you can deduct up to a certain amount of passive losses from your regular income. So if you are making under a certain amount you do have the option to not solely offset passive income with passive losses. This is a question that actually could affect my taxes this year, I'm not 100% sure yet which is why I will ask the accountant.

this is exactly my question. I believe that you can deduce up to 25k passive losses if you make under 100k. however from 100k - 150k that 25k phases out. But I am curious if there are work arounds that will allow non real estate professionals to get deductions irregardless of earned income? or if there is a unique way to qualify as a real estate professional even if you have a full time job.

1 Reply
Daniel Han
Investor · Member since 2019 · 74 posts · 70 votes
6y

Could you explain why having LLC would reduce the audit risk?

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