Passive Losses Offsetting Pasive Gains?

[Daniel Dietz]

Hello All,

There is lots of talk on here about Passive Losses and if there are deductible or not and if so, to what amounts.

To my understanding, if you are NOT a 'Real Estate Professional' (which I am, but have never had more than the 25K limit in losses to worry about using it) you are limited to offsetting "passive losses' with 'passive gains'. There is an exception if your income is less than 100K you can write off up to 25K of passive losses.

What I am looking for is clarification on how those passive losses and passive gains 'offset each other' BEFORE they go to your personal tax return.

What I mean is this; let's assume I have a few rentals that I bought recently with modest down payments and maybe even did a Cost Segregation Study on one so with depreciation figured in those are going to give me a passive loss of 50K. Now lets ALSO assume that I have a few more that I bought a while ago with large down payments or cash so with low/no interest to deduct THIS set of properties show a passive GAIN of 30K.

So now the question is; Do I only get to us 25K of that 50K loss, or do the properties 'offset' BEFORE going over to personal tax return - meaning 50K loss + 30K gain = 20K loss? Hope that makes sense :-)

Thanks, Dan Dietz

[Lane Kawaoka]

If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.

Explained in a different way...

1) There are ordinary/W2/active income on one side. Lets call that the :( side.

2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.

So there is a barrier between 1 and 2 above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes.

PS - I am not an attorney but I became financially free doing this for myself after 10 years working as a w2 engineer :( world