REPS status scenario + underwriting paper losses

[Alex Todd]

Hi all - my wife and I are planning on a April 2025 1031 exchange into a larger (for us at least...like 5-8 units) multifamily unit. An idea we have is, I am burnt out from W2 life, and wife makes great money (+$300k) , and I could take the year to repair/renovate, manage, rent, repeat the units in the MF qualifying for REPS status (50%, 750hrs, material participation, etc). 

This could have three fold impact ---> allow for writing off paper losses against W2 income, increase the property value by increasing monthly rent, and all the normal cash flow benefits for RE...right? Anything else I'm missing?

What we're struggling to understand is how to underwrite/estimate the paper losses that a MF would produce and IF this strategy is worth it from an income/tax savings perspective. Am I overthinking it, or is the underwriting...Depreciation (with or without Cost Seg), Mortgage interest, normal operating expenses? 

I appreciate the guidance! 

[Account Closed]

Quote from @Alex Todd:

Hi all - my wife and I are planning on a April 2025 1031 exchange into a larger (for us at least...like 5-8 units) multifamily unit. An idea we have is, I am burnt out from W2 life, and wife makes great money (+$300k) , and I could take the year to repair/renovate, manage, rent, repeat the units in the MF qualifying for REPS status (50%, 750hrs, material participation, etc). 

This could have three fold impact ---> allow for writing off paper losses against W2 income, increase the property value by increasing monthly rent, and all the normal cash flow benefits for RE...right? Anything else I'm missing?

What we're struggling to understand is how to underwrite/estimate the paper losses that a MF would produce and IF this strategy is worth it from an income/tax savings perspective. Am I overthinking it, or is the underwriting...Depreciation (with or without Cost Seg), Mortgage interest, normal operating expenses? 

I appreciate the guidance! 

 Hey Alex, 
Your idea makes a lot of sense given the fact that you're burnt out on your W-2. You could take this time to take a break and qualify for real estate professional status while your wife continues to make great money.

As far as the estimating paper losses that multifamily would produce if the strategy is worth it from a tax perspective, you would want to use a cost segregation calculator. I have one of these on my website if you need. You can figure out what depreciation would get created based on the particular property you're buying and you can then use that depreciation against your wife active income and make the calculation like that. Please let me know if you have any questions.