Single Family Tax Advantages

[Jim Madden]

I am a new, confused investor that bought four single family turnkey homes in 2016. I had a CPA do my taxes and am not clear about the tax advantages of owning SFHs. I do not qualify as a real estate professional.

1. Does this mean I am a passive investor?

2. Are the Schd. E deductions only applied to rental income, and not W-2 wages, social security payments and IRA withdrawals?

3. Does the income limit of $100,000 and phasing out at $150,000 apply to passive investors or real estate professionals?

4. Does the $25,000 deduction limit apply to the above information?

5. Is my tax situation described simply that If I keep my income(SS payments, W-2 income and IRA withdrawals) under $100,000 I can deduct up $25,000 from my rental income? What do I lose if I exceed $150,000?

6. Is the goal to have deductions that exceed rental income, so that income is sheltered from taxes?

Pleas help. The more I read BiggerPockets, the web and IRS documents, the more confused I get.

[Linda Weygant]

@Jim Madden - Ooof.  Lots of questions here, but I'll try to break it down for you as best as I can.  But honestly, my best advice is to get with a real estate savvy CPA and have a conversation about what you've embarked on.  It's a special kind of adventurer that embarks on a journey without understanding a good majority of what to expect going forward.

1.  Yes, rental income is passive.  

2.  Schedule E is where all of your rental income and expenses are reported.  You add up all the income, subtract out all the expenses and you're left with a number at the bottom.  If the number is positive (a profit), that carries over onto your 1040, added to the rest of your income and you pay tax on it.  If it's negative, then you MAY be able to write off up to $25,000 of those losses against your other income.  However, if your other income is more than $100,000, those losses become "phased out".  That is, part of the losses become deductible and part don't.  If your income is up over $150,000, your losses are "completely phased out" and you do not get to write them off this year.  Instead, the losses roll over to the following year where they are first applied against any other passive income you may have in that year, then the same test applies with regard to your other income again.

3.  The phase out rules apply to passive investors.  Real Estate Professionals may choose to write off their rental losses against their other income with no phase out limits.

4.  Yep.  See above.

5.  Yes, that's right.  If your income is under $100,000, you've got nothing to worry about.  If it is between 100 and 150, your losses are partially phased out.  Up over $150 and they are fully phased out.  But as I said, they roll over to the following year and the same test is applied, in definitely, until the property that generates the losses are sold.  Then you can declare all of the accumulate, unused losses all at once.  Beware Depreciation Recapture in this event (beyond the scope of this answer for now).

6.  Yes and no.  Different people have different scenarios that work best for them.  There is no cookie cutter approach to this.  You should talk to a CPA about the scenario you are currently in and see what structures, methods and advantages are available to you.  Everybody's scenario is different, so it's tough to say.