Is there a scenario where investing in RE offsets other taxes?

Question

Is there a way to use investing in real estate to help offset someone's taxes? The scenario is a single member LLC filing as an S Corp. The tax burden is high, and I was wondering-if funding were not an issue-is there a way to invest in real estate and produce a book loss to offset taxes?

My apologies if this is extremely elementary. I have absolutely zero experience in this, but I'm an avid internet sleuth... I found that one way to reduce tax burden would be to put funds into the real estate and then take a loan out on the real estate-thus reducing your taxes to whatever the interest on the loan would be. Plus, then your business would have an expense-interest-in addition to depreciation and whatever else came up. I honestly don't even know if that is "ok" so, if I'm breaking some kind of law, I didn't mean to! :)

Anyway, just curious if one can reduce taxes LEGALLY by investing in real estate.

Thank you for any responses! I appreciate it.

Jim Kennedy · Answer

@Kevin Siedlecki -now I understand. They would offset your income tax, but not the self employment tax due on the net income of your contracting work.

Kevin Siedlecki · Answer

@Jim Kennedy- sorry I was unclear. I meant my personal AGI before real estate. I do contract 1099 work and have a w-2 job, so I always owe taxes on my personal return before the LLC is considered. Last year I had to carry a loss over, but still owed the IRS several thousand from my 1099 stuff. It's a very irritating window to be in!  I'm just wondering if there are deductions I can apply to my AGI so I can take more of that carried loss on real estate for this year's taxes. AGI is before itemized deductions, right?

Jim Kennedy · Answer

@Kevin Siedlecki In the end its not about which ones apply, its about the of the income vs the expenses. You can deduct all the expenses in connection with generating rent - interest, taxes, insurance advertising, supplies, repairs, and so on. If you go to irs.gov, select "forms" look at Schedule E, page 1, and there you'll see the approximately standard expenses that landlords incur and write off...that should give you a lot oanswers before the test.

Jim Kennedy, CPA

Kevin Siedlecki · Answer

Lisa Gardner - The short answer is yes. The "how" is a little tricky, and can take many forms.

First, ALL your expenses on rentals are tax-deductible. The only "exception" is the principal you pay on the interest. That isn't really an expense, just a transfer for equity from cash to property. So you're only taxed on whatever cash you have left over after you've paid the mortgage, taxes, insurance, water bill, lawn care, snow removal, rodent removal, plumbing bill, etc.... kind of.

Here's the deal - you pass through LLC earnings to your personal return. If those earnings are negative, then it creates a reduction in your taxable income. Perhaps confusingly, you don't have to actually lose money to show negative earnings. The key is depreciation. You depreciate the value of the structure over 27.5 years. That means on most real estate investments, if you just barely break even, you actually show a loss of several thousand dollars. You can also put money into the property in the form of improvements and maintenance, and depreciate those expenses, too.

The bottom line is, for multiple reasons, if your goal is reducing your tax burden, then buy expensive properties in A neighborhoods with lowish ROIs, and put any money you make back into the property, keeping it in pristine condition in addition to avoiding any tax on that income, and pass-though the depreciation loss to your personal return.

To be clear, I do not endorse that strategy - I want my money working for me, no matter how much of it the government is going to take. But if taxes are your primary concern, that's the way to do it.

Kevin Siedlecki · Answer

@Jim Kennedy - I'm currently in that $100-150k window, and couldn't apply all of my paper losses from major renovations and depreciation last year. Question for you- which deductions apply to AGI?

Jim Kennedy · Answer

I am a CPA with real estate investing expereince and real estate clients. BE careful if you are doing real estate investing in your S Corp. If there is more than a certain percentage of passive income, you can lose your S Corp status.

Otherwise, real estate income is ordinary and can offset all of your other ordinary income - payroll interest, dividends (most),  and self employment income even lottery winnings and alimony, all so long as your AGI stays below $100K. Then, up to 150K , the losses decrease incrementally till you reach $150, where the loss allowed is zero.

However, those losses will wait for you till your income drops and if it deopsnt then you ge them when you sell the property.

Neat stuff, eh?

Jim Kennedy CPA