How do high wage earners benefit from real estate related tax deductions?

[Tim Smith]

Longtime lurker, first post. Thanks to the BiggerPockets community for all the invaluable advice -- it's helped me personally and professionally for many years.

Here's my question: This year my wages at my non-real estate job increased to $190,000. I'm a single filer with no dependents and really no deductions besides the losses from my real estate business, which this year total $25,000, and my personal mortgage interest of $12,000.

My accountant tells me that, because my modified adjusted gross income is more than $150,000 or so, I can no longer deduct my business losses against my income. Furthermore, he also says I can no longer deduct my personal mortgage interest expense against my income.

To the high wage earners out there -- any advice on how to still get these deductions, or other ones? Thanks everyone.

[Jon Holdman]

Ok, Steven Hamilton II, take a break from doing taxes and chime in here.

Almost certain you're mistaken on this point. At least for now, who know about the future.

But he's right about the passive losses from rentals. You can't deduct those. You can carry forward the disallowed losses and offset the gains from the sale when you sell. A related point that's often glossed over on the sale is that there are two taxes that will apply. One is the often-cited capital gains tax. That's currently 15%, if held for over a year. The other deals with depreciation. As you hold the rental, you take (or should take) a deduction for deprecation. That decreases the basis (whether you take it or not.) So, when you sell, your gain is increased. That depreciation is called "unrecaptured depreciation" and is subject to a 25% (currently) tax.

The real tax benefit for rentals is that the income is wholly or partially sheltered from tax, because of the depreciation deduction. But the reality is that good rentals don't generate passive losses. They generate taxable income, even after depreciation. That's good. It means you're making money. This theoretical "passive loss offsetting other income" idea is often used to slap some lipstick on a pig rental.