When Can RE losses not be taken against ordinary W2 income?

Question

My accountant stated, “The losses incurred on the rental properties cannot be taken and will be carried forward as your income exceeds $150k, thus no losses can be taken against your ordinary W2 income.”

I was really surprised by this. My wife and I had significant net losses on our Ohio property (mainly because of renovations) and a DE vacation rental, so I expected that these losses would help to offset some of our W2 income with respect to taxes (my wife and I both live and work in NJ). We own the Ohio property via an LLC and we own the DE property in our personal names (in case relevant). My accountant says No — the losses have to be carried forward. Is this accurate? I thought a major benefit of RE ownership is that any losses can offset other taxable income??

Vicki X. · Answer

Check out

Passive Activity Loss Rules

Natalie Kolodij · Answer

That's not correct.

If your AGI is under $100k you can offset w2/earned income with up to $25k a year of PAL , if between $100-150 it phases out. Over $150k is when the passive loss rules come inot play.

Ashish Acharya · Answer

Your LTR losses might be limited because you are above the 150k threshold and you are not REPS.

Your vacation home might be able to offset the W2 if you have met the material participation rules on your STR.

Natalie Kolodij · Answer

The only exception isn't RE pro- You can also use losses up to $25k if your AGI is under $100k.

Brandon Labordus · Answer

I am NOT a CPA! Hard to say without some more details, but having just gone through this the first time myself:

My understanding is that if the Ohio property is an LTR, you can only use losses from that to offset against LTR gains and rollover the rest. The only exception to this is if you earn Real Estate Professional Status.

The losses on your Delaware STR vacation property may POTENTIALLY offset against your W2 income. If your average rental period for the DE property was <7 days, and you didn't personally use the property for any more than 14 days, this gets classified as business activity income (as long as you materially participated in managing it). There are some hoops to jump through, but since this is active income you can then use any loss (including depreciation) to offset your W2 income.

A great many CPA's that are not real estate specific will not understand the STR loophole. Do your research on here and you will find lots of info on this. My rule of thumb - if you can't find a CPA that understands what you want to do, call 10 more!

John Malone · Answer

@Dali Wei they may not be explaining to you correctly.

The mgmt company and ability to deduct a nonpassive loss are different subjects.

The MGMT company proposed does not affect your ability or lack of ability to utilize losses from this STR.

Dali Wei · Answer

@John Malone For example, the loss from cost segregation and bonus deprecation and use that to offset both rental income from Airbnb (via the s elected LLC) and W2 income. Is that a valid approach?

John Malone · Answer

@Dali Wei what loss exactly? You are shifting RE income to active/earned income, requiring payroll (FICA MEDI taxes etc).

There can be a case for a management company for operational efficiency but not as a loss generator. Perhaps you could use the STR strategy? Several posts if on this (if you search) including below.

https://www.biggerpockets.com/forums/530/topics/1056436-clearing-up-confusion-on-tax-treatment-of-short-term-rentals

Dali Wei · Answer

What if I have a s elected LLC to manage the STR and there would be loss to the business. Can the loss of the business be used to offset my W2?

Jacob Graves · Answer

I dont believe for any income level you can use passive loss to offset w-2 income.

Only works to offset other passive gains. I'm not an accountant but thats how my taxes have worked the past few years.

When Can RE losses not be taken against ordinary W2 income?

When Can RE losses not be taken against ordinary W2 income?

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