Earnings too high to claim passive losses?

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Earnings too high to claim passive losses?

Loic Assobmo
Rental Property Investor · Member since 2019 · 26 posts · 7 votes
Earnings too high to claim passive losses?

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
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 . 

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  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    @Natalie Kolodij what about the 20% off the top of income for LLC? Possible that's what the cpa is thinking: that in his case that's enough to bring him below the threshold?

    Or am I confusing two different concepts here?

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  • Natalie KolodijBusiness Member
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    6y
    Originally posted by @Jonathan R McLaughlin:

    @Natalie Kolodij what about the 20% off the top of income for LLC? Possible that's what the cpa is thinking: that in his case that's enough to bring him below the threshold?

    Or am I confusing two different concepts here?

    The 199A deduction applies to rentals and businesses that are either in your name or the LLC.

    No  additional benefits tax wise. 

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  • Natalie KolodijBusiness Member
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    6y
    Originally posted by @Daniel Han:

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

     1040s are audited more often than partnership returns. 

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  • Natalie KolodijBusiness Member
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    6y
    Originally posted by @Loic Assobmo:
    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.

     There are no workarounds. 

    I listed the ways you can use those losses above 

    - Qualify or have a spouse qualify as RE pro 

    - Have passive income (passive losses can always offset)

    -Create a bigger picture plan for losses as in the year a property is disposed of all the prior disallowed losses become available to deduct (You can potentially sell a property tax free from prior losses banked up)

    No there is no secret way to get a HUGE benefit without qualifying for it. If you spend more time in any other combined activities besides REI you don't meet the test for RE pro. I just did a youtube video about a tax case where the IRS disallowed their RE pro status even thogh they had logs, and the husband was retired and only focused on their 2 properties. It's looked at quite strictly because it is a huge benefit.

    Work with a tax professional who will help you cultivate one of the above options so the losses can benefit you in some way, even if it's not  direct offset to your income this year. 

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  • Nicholas Bolcon
    Coventry, RI · Member since 2018 · 73 posts · 39 votes
    6y

    @Natalie Kolodij The create a bigger plan is a potential for me.  I have a flip hopefully going on the market in the May-June time-frame this year so passive losses from last year may be able to offset that profit from this year as well.

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  • Natalie KolodijBusiness Member
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    6y
    Originally posted by @Nicholas Bolcon:

    @Natalie Kolodij The create a bigger plan is a potential for me.  I have a flip hopefully going on the market in the May-June time-frame this year so passive losses from last year may be able to offset that profit from this year as well.

     Ehhh it's very circumstantial. I would utilize a tax pro. 

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  • Nicholas Bolcon
    Coventry, RI · Member since 2018 · 73 posts · 39 votes
    6y

    @Natalie Kolodij Oh of course.  I already had a conversation with my accountant about the flip, we will figure out some more of the details at my tax appointment in a couple of weeks.  From all the advice I have heard on here I am not willing to try it on my own and I think a good accountant is worth the money.

    Some people find it boring but I am kind of excited to do some "tax planning" and see the ways I can save money or get a better return.

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  • Oleksandr IvanovskiyPro Member
    Rental Property Investor · Member since 2019 · 124 posts · 38 votes
    6y

    @Brittany R.

    Your LLC needs to be doing real business.

    0Reply
  • Ryan Proffit
    Saint Joseph, MO · Member since 2018 · 401 posts · 244 votes
    6y

    @Natalie Kolodij I hope you gain tons of business from all the help you provide. Thank you.

    3Reply
  • Loic Assobmo
    OP
    Rental Property Investor · Member since 2019 · 26 posts · 7 votes
    6y

    @Natalie Kolodij slightly different question - when you build new construction projects, is the construction budget deductible for tax purposes the same way that your rehab budget on a brrr can be deducted?

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  • Natalie KolodijBusiness Member
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    6y
    Originally posted by @Loic Assobmo:

    @Natalie Kolodij slightly different question - when you build new construction projects, is the construction budget deductible for tax purposes the same way that your rehab budget on a brrr can be deducted?

     Neither of those are deductible. 


    When you build to sell it's inventory- your constitutions costs are a cost of goods sold and deducted against the sale price when it sells. 

    WIth a BRRRR it increases your basis, some stuff can be separated and expensed at once. it's dependent on the tangible property regs and the specifics.

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  • Loic Assobmo
    OP
    Rental Property Investor · Member since 2019 · 26 posts · 7 votes
    6y

    @Natalie Kolodij

    Thanks for clarifying. So just to be clear your net taxable obligations are based on sale price minus construction costs?

    When we have done brrrs in the past - after acquisition - redoing carpeting, redoing windows, repainting etc. these expenses we itemized and then deducted against our net profits. Are you saying this is incorrect?

    Thanks,

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  • Andrew SyriosPro Member
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    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    6y

    I believe since the 1986 Tax Reform Act, only real estate gains (or any passive gains I believe) can be offset by real estate losses. That being said, at least it's a good problem to have...

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Nicholas Bolcon

    @Loic Assobmo

    Just seeing this discussion. Second comments about the agi limits starting at $100k and phasing out at $150k. Not much you can really do if your w2 income is high. Not going to repeat much of what was said..

    But, you should look at different way. Hopefully, you have a “good rental deal” and have positive cash flow. Then, I assume you have a negative reportable tax balance because of the non cash deduction created by depreciation. The point is, if you have a good rental deal, you actually are getting more cash, but that income is being wiped out. Y depreciation. So, you are getting tax free passive income! Furthermore, you should be banking your passive allowed losses (pal, using f8582). So, when/if your expensive are low and rents are high (eg, in the future the rental market goes up), you can continue to offset those gains against your pal. More tax free income!

    For those doing future tax planning, be mindful when you sell (assume a straight sale). There is depreciation recapture and the pal becomes available. It’s a bit much to go into here, but each comes into your 1040 through different forms.

    Lastly, I believe one poster said had flips coming up and wanted use to offset. To be correct, a flip deal makes you an active dealer and not a passive investor. In which case the profit on your flip actual counts as ordinary income also subject to self employment

    Please note I’m not a lawyer or cpa. You really need to talk to a competent professional. Good luck

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  • Ovais Zuberi
    Skokie, IL · Member since 2016 · 13 posts · 2 votes
    6y

    @Natalie Kolodij

    I'm running into the same issue as OP and was wondering would passive loss from rental properties be used to offset passive income from trading stocks and securities? Thanks 

    0Reply
  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @Ovais Zuberi:

    @Natalie Kolodij

    I'm running into the same issue as OP and was wondering would passive loss from rental properties be used to offset passive income from trading stocks and securities? Thanks 

     Stock sales will be captial gains income which is a different category than passive income

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  • Ovais Zuberi
    Skokie, IL · Member since 2016 · 13 posts · 2 votes
    6y

    @Natalie Kolodij

    Got it, one last question, if I were to sell the property would I be able to use the passive loss to negate capital gains and depreciation buyback?

    Thanks

    0Reply
  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    6y
    Originally posted by @Ovais Zuberi:

    @Natalie Kolodij

    Got it, one last question, if I were to sell the property would I be able to use the passive loss to negate capital gains and depreciation buyback?

    Thanks


    Yes when a house is sold all previous losses on ANY of your rentals offset the gain on sale 

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    0Reply
  • Ovais Zuberi
    Skokie, IL · Member since 2016 · 13 posts · 2 votes
    6y

    @Natalie Kolodij

    okay, thanks for the clarification - my CPA was telling me that the passive loss would only apply to the capital gains portion and not depreciation buy-back. I'll be sure to bring this up with them for 2019 taxes. 

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