Best tax strategy for >150k earner to own investment property

[Rudolph T.]

Hello my fellow BPs, I'm considering of starting my first investment property soon. I have been doing my own research by reading the BP blogs, listening to the podcasts, asked people questions (including my CPA). However, there's still one burning question that I feel I don't completely understand as it's not frequently discussed. I'm a high income earner with >150k/year, single and becoming a real estate professional is not an option. What's the best tax strategy for me to own real estate investment properties if I can't deduct passive losses against my earned W2 income? I have been told that in my situation, I can only use passive losses to offset passive income. Do I need to have a business entity (LLC, S corp) to do this? Thanks!

[Paul Allen]

Hi Rudy. It's not that you can't take the passive losses against active income, its just that the losses are 'suspended'. That means you get to save them until:

a) you have passive income in a subsequent year. (hopefully your properties are not perpetually losing money)

b) you sell the property (they are added to your adjusted basis)

c) you die (at which time unused passive losses expire)

Forming a pass through entity will not help you deduct passive losses against active income.

Good luck on your first investment property!