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Updated about 6 years ago on . Most recent reply presented by

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Carlton Wood
  • Insurance Agent
  • Piscataway New Jersey
12
Votes |
33
Posts

$25,000 Offset Question???

Carlton Wood
  • Insurance Agent
  • Piscataway New Jersey
Posted

What’s up BP!!! Have a question about the $25,000 offset I’m hoping someone could answer for me. To be clear I’m referring to the up to $25,000 in passive losses that the IRS allows you to offset your earned income by. 

I was reading up on the $25,000 offset and I’m a bit confused about how it’s calculated. One book I was reading spoke about multiplying your net loss by your effective tax rate and using that number to offset your income. Another book I read says to just take your net loss and use that number to offset your income.

Example 1

You make $10,000 in rental income, you subtract your expenses and depreciation and have a net lose of -$10,000. Assuming you have a W2 income and your effect tax rate is 22% you multiply that by -$10,000(.22X-$10,000) and get -$2,200 and you can offset your income by $2,200. So if you made $82,000 you could lower your taxable income to $79,800.

Example #2

You make $10,000 in rental income and you subtract your expenses and depreciation and have a net loss of. $10,000. You take they negative -$10,000 and offset your income by the whole $10,000. So if you made $82,000 you would lower your taxable income to $72,000

Of course both examples are assuming you made no more than $100,000 and you were involved in your real estate business enough to qualify for the offset.

Which example would be the proper way to calulate the offset?

Most Popular Reply

User Stats

33
Posts
12
Votes
Carlton Wood
  • Insurance Agent
  • Piscataway New Jersey
12
Votes |
33
Posts
Carlton Wood
  • Insurance Agent
  • Piscataway New Jersey
Replied
Thanks for your response!! This is what I thought, however I was reading the loopholes of  real estate and the book gave an example of multiplying your paper loss by an effective tax rate of 35% to calculate your tax savings. It kind of through me for a loop.... no pun Intended
Originally posted by @Ashish Acharya:
Originally posted by @Carlton Wood:

What’s up BP!!! Have a question about the $25,000 offset I’m hoping someone could answer for me. To be clear I’m referring to the up to $25,000 in passive losses that the IRS allows you to offset your earned income by. 

I was reading up on the $25,000 offset and I’m a bit confused about how it’s calculated. One book I was reading spoke about multiplying your net loss by your effective tax rate and using that number to offset your income. Another book I read says to just take your net loss and use that number to offset your income.

Example 1

You make $10,000 in rental income, you subtract your expenses and depreciation and have a net lose of -$10,000. Assuming you have a W2 income and your effect tax rate is 22% you multiply that by -$10,000(.22X-$10,000) and get -$2,200 and you can offset your income by $2,200. So if you made $82,000 you could lower your taxable income to $79,800.

Example #2

You make $10,000 in rental income and you subtract your expenses and depreciation and have a net loss of. $10,000. You take they negative -$10,000 and offset your income by the whole $10,000. So if you made $82,000 you would lower your taxable income to $72,000

Of course both examples are assuming you made no more than $100,000 and you were involved in your real estate business enough to qualify for the offset.

Which example would be the proper way to calulate the offset?

 Yes, you would offset your ordinary income by the total loss. Not after multiplying with your marginal tax rate. 

If you do your own tax return, when you fill out your schedule E info and take all the deductions, your software will automatically pull your full alllowable losses to offset your ordinary income. 

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