Real Estate Loss Carryover to Offset W2 Income - via Corporation rather than LLC

[Yash Sharma]

Hi all - new to the community and wanted to ask a question about the real estate depreciation / cost seg strategy and using resultant depreciation to offset W2 income. I understand this is a long-discussed topic but had a specific question that, at least to my knowledge, hasn't come up before.

The way I understand most investors do things is to acquire 1-2 properties esp. when they're starting out, and hence the hurdles to meet the "coveted" RE professional status seem a bit out of reach for folks. Most of what I've read seems to suggest that people either hold these properties themselves or under a pass-through single-member LLC structure (disregarded for tax purposes).

However could we not draw a corollary from the case where say you owned an actual business, you would be able to deduct all losses from that business to offset your ordinary W-2 income. What if you set up an LLC that was set up as an actual corporation and filed its own taxes separate from individual taxes. What if this Corporation held the title to the properties, maybe even the loan itself (understand rates are meaningfully higher for LLC vs individual borrowers). That way, the corporation would generate an NOL (just like another business would) - and just like a Corporation can pass through income / losses to the shareholder taxpayer, this entity would similarly pass along the real estate losses / income to the individual tax payer.

Believe there's a $500K limit for such NOLs for Married/Joint filers. Assuming you're under this cap, would this not be a way to use the cost seg within the entity and be able to utilize any potential losses / income on individual income?

Even as I write this, I can think of at least two potential drawbacks of this, assuming this would even be allowable:

1. Once the property turns net positive, there may be double taxation that would occur - once at the corporate level paying the statutory rate and then as capital gains once the business passes along the profits to me as an individual shareholder

2. Section 1031 exchanges - not sure if these are only available to individuals or to businesses as well - but assuming you sell the property in the future, if 1031 exchange isn't available, that'd be a significant amount of depreciation recapture / realized gains from the sale - that again would incur the double taxation challenge discussed above.

2a - Maybe there's a way to time things so you buy a property in the same year as a sale, that way a cost seg on the new property can offset some of the gains from the old property but don't think there's a way to avoid the depreciation recapture

I've also not discussed with a CPA / tax lawyer yet - but I'd assume that just like my trust can own a disregarded LLC, it can also own the shares of this corporation that owns the real estate. So when I do pass away, my beneficiaries would similarly benefit from the step-up in basis to fair market value of the LLC, which would consider the then-/future-value of the real estate. I'd assume there'd still be corporate taxes that would need to be paid because technically, it'd be the corporation selling the property in the future and not the trust directly. But that would at least not trigger taxes once received by my beneficiaries.

Welcome thoughts from the community here, as I am sure others have considered alternate pathways of owning real estate. Sorry for the long post and thanks in advance to the community for your responses!