Multiple real estate income streams in LLC

[Account Closed]

I just finished last year's taxes and have a large passive loss (after depreciation) on my rentals. But being a passive investor with large W2 income, I cannot benefit from the tax loss (at least thats what my accountant says). My question is: If I put the properties in an LLC along with other investments (tax liens, private lending etc), then could I offset gains on those investments with the passive losses on the rentals? Again, they would all run through the same LLC.

[Nathaniel Busch]

Originally posted by @Account Closed:

I just finished last year's taxes and have a large passive loss (after depreciation) on my rentals. But being a passive investor with large W2 income, I cannot benefit from the tax loss (at least thats what my accountant says). My question is: If I put the properties in an LLC along with other investments (tax liens, private lending etc), then could I offset gains on those investments with the passive losses on the rentals? Again, they would all run through the same LLC.

 Anish,

The IRS divides up income into three buckets: ordinary, passive, portfolio.

Your W-2 income is considered ordinary.

Your rental loss is considered passive loss.

Any interest, dividends, or capital gains are considered portfolio. 

The passive loss rules would only permit you to deduct passive losses against sources of passive income. Thus, interest from private lending and capital gains from selling stocks would not offset passive losses. Your only hope to deduct these passive losses from rentals would be any of the following scenarios: 

-Have your spouse qualify as a real estate portfolio. As a result, this would transform your rental real estate activity into ordinary form, thus foregoing the passive loss restrictions and would allow these losses to offset your ordinary income. 

-Acquire more rentals that generate passive income. This would allow for a dollar for dollar offset with passive losses.

-Liquidate your rentals. Liquidating rentals will free up any unused passive losses directly attributable to that rental property. Planning strategy: selling a rental on owner financing / land contract / contract for deed qualifies as a liquidating. Thus, this is a way to still retain a cash-flowing property without completely giving it away. The suspended losses related to that property would be immediately deductible. 

There are other strategies. I would recommend you consider working with an accountant that specializes in real estate if you are determined to find creative ways to deduct these losses.