Reducing W2 income tax by actively participating in real estate

[Masashi Borges-Silva]

Background

I am not a Professional Real Estate (yet) as I am working as a full-time engineer, and I don’t meet 750 hours of services during the tax year in real property trades or businesses in which I participated. I don’t own a property (yet), but I am trying to figure out ways to reduce W2 income taxes. I am also not a professional CPA or in a position to provide such advises, and below are what I read and how I understand it. Please seek professional services appropriately.

Question

What are examples of “loss from rental real estate activities” mentioned in Special $25,000 allowance found in Publication 925 (2021), Passive Activity and At-Risk Rules?

The definition of the Special $25,000 allowance I found is here, and an example used in the document is as follows:

Example. Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and isn’t subject to the modified adjusted gross income phaseout rule. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages).

Ok, this is where I might need more help for me to understand the allowance.

Can rental property depreciation be applied as loss from rental real estate activities?

In this example above, I am assuming that $11,000 will be deducted from $70,000. The adjusted gross income would be $59,000, and the tax saving would be $2420 (assuming there are no other deductions applied).

Let me describe how I calculated the tax saving. By using the 2021 bracket and both gross incomes ($70k and $59k) would fall under the same 12% bracket (between $19,900 and $81050), the total tax I calculated for each is $8602 for $59k income and $11,022 for $70k income, and finally, the difference of the two scenarios is $2420.

One of the many “losses from rental real estate activity” I can think of is the depreciation of the property. For example, if I bought a property at $100,000, can I claim that $3,636 (depreciation over 27.5 years is calculated as $100,000 divided by 27.5 years = $3,636/year) is considered as a part of rental real estate loss? Similarly, if I bought a property at $700,000, and the depreciation over 27.5 years is calculated to be $25,455 ($700,000/27.5 years = $25,455/year), then this depreciation would reach the maximum allowance that any other “loss from rental estate activities” are no longer applicable.

Examples of other posts related to my questions

Is the $25,000 special allowance only for Married individuals? In this thread, the author is asking if the special allowance for single individuals would be $12,500

*Interpretation of 8582 Special Allowance for Rental RE Activities:* In this thread, the author is asking about the difference between “nonpassive” and active (W2) income and special cases in which up to $25,000 of passive losses can be used to deduct from a W2 income.

*$25,000 Offset Question???* In this thread, the author is asking about is $25,000 is offset from your earned income.

After thought

I am in search of a CPA/financial advisor to discuss tax planning and tax saving strategies. Do you have any recommendations?