Buying another property to offset taxes

[Jerry Daily]

I currently own a rental property that profits at least 15K after all deductions. I also own a rental property in cash under an LLC that profits very little on paper. I also have a primary residence with nearly a JUMBO loan at a high interest rate and I own a vacation place in cash (small trailer not worth much money but i also own the land) in a different state that I pay RE taxes on.

I am considering buying another rental in my name that will generate a loss but will help me build equity and reduce my taxes. If I buy another house that I rent that loses 15K on paper, would that offset the 15K I would be paying in profits for my other property? Do I have any SALT limitations that are impacted since these are not owned by an LLC or do the SALT limitations only apply to primary residences?

Any suggestions on how I can lower my taxable income is appreciated. Below is my current situation.

LLC:

Owns one property in cash worth about 350K. Income is around 20K, Expenses (including paper deductions) about 20K. 

Personal assets/liabilities:

Primary Residence: Have less than 20% equity in this, rest is owned by bank at high interest rate close to 7%. RE taxes are almost 9K/year. 

Rental property: Worth around 500K; About 250K loan at low interest rate. Profits at least 15K after all expenses.

Trailer: Owned in cash, do not rent (wouldn't be worth much to rent). Pay about 2,800 in RE taxes and 1,200 in HOA fees. I am unable to write any of this off due to SALT limitations.

[Benjamin Weinhart]

Quote from @Jacob St. Martin:

Hello Jerry, 

I want to preface by saying that I am not a CPA and that you should definitely have a CPA with experience in RE because they would be able to answer these questions. If you have one and they can't answer these questions you need to fire them and find one who can. 

Now that that is out of the way, hopefully I can help with at least some of your questions:

You can only offset the gains from one property with the losses from another if you are utilizing one of two tax strategies. One is having the tax status of qualified real estate professional, which basically means that your primary job is on real estate. The other way is using the short term rental loophole but you have to be the person spending the most time in managing the asset which may not be worth it for you. 

If you are able to get the qualified real estate professional status then your plan would work. In an ideal world you want to buy a high price tag property that makes you a small amount of profit but is an on paper loss from the huge depreciation on it. 

I am not sure about SALT limitations, sorry!

When it comes to your LLC I believe that you should be able to capture the depreciation from those properties against your other ones assuming you are a qualified real estate professional as long as you are a single owner of the LLC. I think it is then considered a pass through entity, but is not if you have partners. I am not 100% sure on this though so I would definitely advise talking to a professional.

Lastly, based on your portfolio and your questions, it sounds like you are a high learner but haven't been making that great of returns in your portfolio. Have you considered investing or syndications or as a cash partner with an active investor. These options could get you much higher returns with none of the headache. Let me know if you want to chat more in depth about anything here, I hope this helped!

Hi Jacob, I just wanted to give some additional clarification quickly for any who may be looking at this later for reference. STR and a qualified real estate professional have nothing to do with having two rental properties netting together. These are strategies used to use a loss to offset active income you might have from something like a W-2/1099 employment/contractor position for example. Assuming both properties are/would be LTRs, these would be netted together on Schedule E, which would flow through to Schedule 1 and/or Form 8582.

You'd also want to be aware of the potential for depreciation recapture when going to sell the property if you're not using a tax-deferred exchange. A lot of depreciation can be a bad thing if you have a large recapture event a couple years later. In my opinion, it's much better to find a property that is profitable out-the-gate and seeing the tax benefit as more of a secondary benefit.

For the pass through entity bit, a single-member LLC is actually a "disregarded entity". Pass through entities are similar, but are more commonly known as S-Corps or Partnerships where the income "passes through" to your individual return in the form of a K-1.