This sucks!! Tax Laws are &^%$

[Jak Dadi]

The last week has been depressing as we went through a prelim exercise to understand our tax situation. We have a MAGI of over $150k through 2 W-2's, live in a rented house and own a few multi-families. We made a rental loss last year since the properties were purchased in second half of the year, but as we went through the tax exercise, we find out that we are not able to write off the losses because of our MAGI. Even though I easily spent more than 750 hours last year on real estate investing, it is still counted as passive activity because of our W-2's.

Does anyone else have this same experience? One CPA we talked to said we should buy a primary home first, which in our neighborhood would be over $1M. We wanted to build some assets before we took on such a liability. We are meeting with 2 other CPA's to get their inputs. For us, the thought of financial freedom and generating enough cash flow to replace our salaries is the primary driver, not to mention, real estate investing is now a full time passion/obsession etc.

Anyone in similar situation??????

[J Scott]

First, keep in mind that you haven't lost those rental losses. While you can't write them off this year (because of your AGI), you will be able to carry them forward and write them off in a future year when your AGI (and loss limits) allows.

Unfortunately, this is just one of the detriments to how the IRS defines "Real Estate Professional" and I'm not sure there is much you can do to offset it.

Personally, I disagree with you CPA about investing in a personal residence first just because you can't write off the losses. While there are plenty of reasons why you might want to buy a personal residence first, I don't believe this should be a big driver for that decision.

Btw, this is one of the biggest reasons why most experienced RE investors will say that tax benefits shouldn't be a big factor in whether an investment is good or not. If an investment can't stand on its own without the tax benefits, it's probably not a great investment -- remember, tax benefits can go away with a congressional vote, but selling an asset that's losing money takes a lot more work!