Income too high for real estate deductions?

[Amy Gardner]

Hello,

My CPA recently told me that the $50k we spend last year can not lower our tax burden because I have too high an income? Something seems to be missing here...I have never heard of this on any of the podcasts (I don't think). Perhaps deduction is not the right word? We replaced flooring, window treatments, painted the interior, made major upgrades to the termite infested exterior, and more. This is what our CPA says:

"The rental real estate loss allowance is a federal tax deduction available to taxpayers who own and rent property in the U.S. Up to $25,000 may be deducted as a real estate loss per year as long as the individual's adjusted gross income is $100,000 or less. The deduction phases out for individuals earning between $100,000 and $150,000. People with higher adjusted gross incomes are not eligible for the deduction."

I make $110k per year from my W2 before taxes and I live in CA. My husband makes about the same and we file jointly. We do not have the rental property in an LLC or S-Corp. Any ideas on how to optimize the $50k we spent to upgrade our rental would be much appreciated. We filed an extension and are about to finalize for 2022.

Many Thanks!- Amy

[Melissa Nash]

Quote from @Amy Gardner:

Hello,

My CPA recently told me that the $50k we spend last year can not lower our tax burden because I have too high an income? Something seems to be missing here...I have never heard of this on any of the podcasts (I don't think). Perhaps deduction is not the right word? We replaced flooring, window treatments, painted the interior, made major upgrades to the termite infested exterior, and more. This is what our CPA says:

"The rental real estate loss allowance is a federal tax deduction available to taxpayers who own and rent property in the U.S. Up to $25,000 may be deducted as a real estate loss per year as long as the individual's adjusted gross income is $100,000 or less. The deduction phases out for individuals earning between $100,000 and $150,000. People with higher adjusted gross incomes are not eligible for the deduction."

I make $110k per year from my W2 before taxes and I live in CA. My husband makes about the same and we file jointly. We do not have the rental property in an LLC or S-Corp. Any ideas on how to optimize the $50k we spent to upgrade our rental would be much appreciated. We filed an extension and are about to finalize for 2022.

Many Thanks!- Amy

Yes, the pain! and very common, but there are 2 solutions for you.
 

#1. for passive investing you need to see if you or your spouse can quit their job and become a self employed. That is goal to get ALL of the real estate deductions. Then you can claim "professional real estate status" on your taxes if you hit the hours required. This is the goal for every passive real estate investor to claim this... but it might take you a few years to make this work. I would ask your CPA if the deductions you are missing are more than or less that 1 of your incomes. 

For example- one of my clients is a teacher-- barely making $50k a year. Her husband makes a good salary so they can't take advantage of all of the real estate write-offs. But because her income is so low, she literally can quit her job and focus on the real estate they own- (and fill the hours required). And now just this year they got a $140k tax deduction because of their portfolio and that is way way more than her job paid her. They get to take it all now & now she has her time freedom back and more money!

So its so important to find a tax advisor if your CPA can't do this. 

#2. buy short term rentals that you self manage, the hours you claim are less and you don't have to quit your job, its what I call the "STR loophole" My CPA send me the exact requirements and I put it in a PDF if you are interested or want to share it with your CPA to see if you can qualify for it. Feel free to message me for it.