Taking a small loss to save on taxes?

Question

Hello all,

I am looking to buy an apartment building. Right now, the best offers around me are for some 1.3-4 million, that only generated around 100k per year gross, so there would be a high chance of not cash flowing, and paying money, especially with a commercial loan (these buildings have more than 4 units).

I was thinking that although the rental itself does not generate money, I would be able to deduct the mortgage interest, and depreciation from my personal w2 income and would be net positive. I am in one of the higher tax brackets and could be saving around 40k~ a year on taxes with this. Mean while i would be building equity, and if rates do lower, or when the term ends, could refi for better rates and then maybe cash flow.

My questions are:

Is this too naively optimistic?

Obviously there are risks if I get laid off and would loose all the tax savings and be paying out of pocket for the property, but are there other things that I should consider?

Thanks all

Aaron Zimmerman · Answer

I am a CPA. Unless you're a real estate professional or doing the STR loophole, you can not use those losses against active income.

I would strongly encourage you to buy properties that cash flow or break even. This is a classic case of trying to let the taxes dictate the investment decision. There is plenty of tax planning opportunity with a property type of that size.

David Krulac · Answer

For me I would not buy a property with zero or negative numbers.  Look harder.  I spoke in Raleigh, last April and think its a great place to invest. BTW, I just bought 5 properties in 5 days in 3 states.  Even though there is low inventory, interest rates are high, and many properties don't cash flow, look harder there are always deals, you just need to find/make them.

Basit Siddiqi · Answer

First - Have a discussion if the rental loss will immediately help your tax situation. Second, real estate investments generate a return in one of two ways - Cash flow and appreciation.If cash-flow is negative, is the appreciation making up for it?Is the sum of the cash flow and appreciation higher than your required return?

Travis Timmons · Answer

I am also not a CPA but @Avery Heilbron is correct. You cannot use those losses to offset your primary income unless you are a real estate professional. My non-professional understanding is that those losses can only be used to offset income from that property.

Avery Heilbron · Answer

@Victor Yang I am not a CPA but you cannot take passive losses (real estate activities) to offset active income (W2) unless you make under a certain threshold from your W2 (I don't recall the exact salary).

That being said if it is turnkey and you can't value add to create rent growth then probably not worth it at the price

Ashish Acharya · Answer

@Victor Yang To use the rental losses to offset any active income (W2), you'd have meet Real Estate Professional status (which would be difficult to do with a W2 job because you'd have to work more on real estate than any other job to qualify) OR have an AGI of $150K or less. If you have a significant amount of passive income (from passive investments maybe from K-1s or other rental properties), then you could use the apartment rental loss to offset that passive income only. This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Chris Seveney · Answer

I never buy a property based on it being tax benefits. I buy property to make money and the depreciation is bonus/gravy. So to answer the question specifically no I would not buy a property that did not cash flow and only for tax basis.

Taking a small loss to save on taxes?

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