How does the $150k AGI rule work for real estate tax deductions against w-2 income?

[Devin Keener]

I'm new to real estate investing and own one rental and a primary residence. I recently found out about the separation between passive and active incomes and that there are rules about crossing the line on how you can claim passive rental losses against your active W-2 income. 

How is the Adjusted Gross Income calculated to determine if you fall into the $150k bracket? If my wife and I make $170k, would the standard deduction bring us down into the $150k range? I don't really understand how this works. I can't use the standard deduction if I itemize so would I rely on my itemized primary mortgage interest, taxes, 401k contributions, HSA contributions, etc to bring me down to the AGI of 150k and THEN take/tap into the passive deductions? Also since the benefit depreciates from $100k-$150k, what kind of passive loss can I claim against my W-2 income at $150k? (My passive losses for the rental are about $20k/year including the depreciation)

TL:DR - Can someone explain to me how the $150k AGI income rule works when claiming passive losses against active income?

Thanks,

Devin

[Account Closed]

Adjusted Gross Income (AGI): AGI is your total income from all sources minus specific deductions, such as the standard deduction or itemized deductions. It's an important figure used to determine your tax liability.

Passive Activity Loss Rules: When it comes to real estate investing, the IRS has established rules to distinguish between active and passive income. Rental real estate activities are generally considered passive activities. Passive losses from rental properties (including depreciation) can only offset passive income unless you meet certain criteria or fall within certain income thresholds.

The $150,000 AGI Threshold: For taxpayers with a modified AGI of $150,000 or less (or $75,000 for married filing separately), the passive losses from rental real estate can be used to offset other types of income, such as W-2 wages, interest, and dividends. However, there is a phase-out range for this benefit between $100,000 and $150,000 of AGI.

Calculation and Deductions: In your case, if your combined AGI with your wife is $170,000, you may be subject to a reduced benefit. You are correct that deductions such as mortgage interest, property taxes, 401k contributions, and HSA contributions can lower your AGI. These deductions can potentially bring your AGI down to the $150,000 threshold, allowing you to claim passive losses against your W-2 income.

Passive Loss Limitation: If your passive losses from the rental property are around $20,000 per year (including depreciation), and your AGI is $150,000 or less, you would generally be able to fully utilize those passive losses to offset your W-2 income. However, keep in mind that these passive losses may still be limited by the amount of income you have from other passive activities.

Itemizing vs. Standard Deduction: Regarding your concern about itemizing deductions, if you itemize, you can still reduce your AGI through those itemized deductions (like mortgage interest, property taxes, etc.). Once your AGI is determined, you can then apply the passive loss rules based on your total AGI.

Important Considerations: It's important to note that tax rules and calculations can be complex and subject to change, and it's recommended that you consult a tax professional or accountant to ensure you're applying the rules correctly to your specific situation. They can help you navigate the complexities of the tax code and maximize your tax benefits within the legal guidelines.