Can Depreciation (as RE Pro) Offset LT Stock Capital Gains

[Christian Espinosa]

I have a situation where I plan to sell stock that is subject to long-term capital gains (20%). I plan to qualify as a Real Estate Professional.

Can I use the bonus depreciation I get from cost segregation studies on my rental properties to offset the long-term capital gains from the sale of stock?

Thanks.

[Michael Plaks]

@Christian Espinosa

First, I'd be careful with "I plan to qualify as a Real Estate Professional." I don't know if you're well familiar with the rules, but qualifying may actually be difficult or even impossible. For example, "impossible" would be the case if you have a full-time W2 job.

Assuming that you do qualify for the REP status, you may think about your cost segregation losses as an offset against your stock gains. In reality, this is not exactly the case.

You get two simultaneous events: tax losses from rental properties and capital gains from stocks. They both show on your tax return. The former is decreasing your taxes, and the latter increases them. However, they do not directly go against each other, unless your capital gains is your only income for the year. If you have other income, such as W2 salary or realtor commissions, the rental losses will offset that income rather than your capital gains. It is actually a better result for you.

Caution: whether or not it is a good strategy to create large losses via cost segregation in the current year depends on your overall tax situation, current and future. While it seems logical to create losses in the year when you expect gains, it is not always the most efficient tax strategy. Often but not always.