Buying Real Estate to Offset Short term Capital Gains

[Adam Jaggers]

Hello BP!

I'm in a somewhat interesting tax situation this year and I thought I'd get some feedback on my strategy (having never done it before). I'll be selling a non-real estate asset (portion of a business) for a significant sum. This is going to be considered short term capital gains. 

My plan is to invest the ENTIRE sale amount into a big deal. Then do a depreciation study (with acceleration) to claim as large of a loss as possible on the first year. I'm hoping to claim as much as the entire down payment (my entire profit), thus avoiding any tax on the money that would have otherwise been considered regular income and taxed at that gross 38% mark.

Does this seem crazy? I'd much rather invest that 38% than give it to uncle sam :)

[Michael Plaks]

@Adam Jaggers

First, even if you could do this, I agree with @Jack Martin strongly: don't let the taxes (tail) wag your business (dog). Buying something just to avoid taxes can backfire big time, unless buying such "big deal" (as you called it) is already part of your business plan.

Second, you probably cannot do it. The maximum loss from long-term rental properties, including losses generated by cost segregation, that you can apply in one year against your non-RE income is $25k. This is only if your overall income is under $100k. Judging by the 38% tax rate that you mentioned, your income is well above this threshold, and you probably cannot claim any losses at all.

There is an exception for "Real Estate Professionals" - a special tax status that you need to qualify for. If you're single and have a full-time W2 job, you won't qualify.