Depreciation Deduction Limits for High Income Earners?

[Jeff Howard]

Hello,

I am trying to figure out the best tax and entity structure and strategy before I start to purchase my first properties.  As a high income earner with my w2 job, will there be limitations in the amount of tax benefits that are available through buy and hold, passive income real estate activities?  I know depreciation is considered the king of all tax benefits in the real estate world, so I don't want to set my self up for disappointment if I cannot take that deduction! Is this somewhat dependent on how I set up my entity structure?  Thanks in advance for any advice.  And, yes I definitely plan on a detailed session with a good real estate savvy tax advisor!

Happy investing,

Jeff

[Dave Toelkes]

@Jeff Howard

All rental property expenses, including depreciation, can be taken against rental income regardless of whether you have a business entity.  A rental property activity is a passive income activity and losses from a passive activity can be used to offset income from another passive activity.  As a general rule, passive losses can only be used to offset passive income.  If your passive loss is greater than your passive income, then your net passive loss is carried forward to the next tax year.

There is a special rule for residential rental property activities with active participation that allows you to use your net passive rental losses to offset up to $25K of your other ordinary income.  This net passive loss allowance is phased out when your income exceeds $100K and disappears completely at $150K and above.

Any net passive loss that exceeds the net passive loss allowance is carried forward to the next tax year when it can be used to offset other passive income.  If the rental property is sold, then any prior carried forward losses for that property can be taken without regard to the net passive loss allowance cap or income limitations.

With this said, any business entity appropriate for a rental property activity would be tax neutral. This means that you have the same tax liability regardless of the presence or absence of the business entity.