Newbie question on personal income and rental income deductions

[Joseph Niedermeyer]

Long time lover of real estate but relative newbie to investing. It’s tax Season and in doing our 2019 taxes I asked about strategies for reducing taxes. I made just shy of $100k last year and want to start investing in buy/hold rentals this year. My day job is commissioned sales and I could realistically see $125k - $150k in 2020. I asked how having rentals would affect my tax situation. Her advice was to keep my overall total income under $150k or I would have to defer deductions for rental expenses or even potentially loose them all together. I know the tax laws have changed a lot in recent years, but I thought deductions on expenses and depreciation and other “costs” were one of the huge benefits of investing in real estate? Or am I misunderstanding what she’s telling me.

[Ashish Acharya]

Originally posted by @Joseph Niedermeyer:

Long time lover of real estate but relative newbie to investing. It’s tax Season and in doing our 2019 taxes I asked about strategies for reducing taxes. I made just shy of $100k last year and want to start investing in buy/hold rentals this year. My day job is commissioned sales and I could realistically see $125k - $150k in 2020. I asked how having rentals would affect my tax situation. Her advice was to keep my overall total income under $150k or I would have to defer deductions for rental expenses or even potentially loose them all together. I know the tax laws have changed a lot in recent years, but I thought deductions on expenses and depreciation and other “costs” were one of the huge benefits of investing in real estate? Or am I misunderstanding what she’s telling me.

 The recommendation of keeping income under 150k is to use the active participation loss allowance for the passive loss. 

Generally, passive loss cannot offset your ordinary/active income. Rentals are passive income. 

Passive activity losses (PALs) generally are deductible only (1) against income from passive activities, (2) when the entire interest in a passive activity is disposed of in a taxable transaction, or (3) under the $25,000 rental loss privilege for qualified rental activities (subject to the $100,000 AGI phase-out).

The general is a rule allowing up to $25,000 of active participation(see below) rental real estate losses as a deduction against nonpassive income.

The taxpayer must make management decisions with regard to the property, have at least a 10% ownership share in the property, and they cannot be a limited partner. Furthermore, a spouse's ownership interest in the property is taken into account when computing the taxpayer's 10% minimum ownership interest

You will be deemed to be actively participating if you make management decisions in a significant and bona fide sense. Management decisions that are relevant in determining whether you actively participate include approving new tenants, deciding on rental terms, approving capital or repair expenditures, and other similar decisions.

In your case, for the next few years, unless your income goes over 150k you are fine.  Remember that you do not lose the loss even if your income goes over 150k, it just gets suspended.

To formulate your strategy, please consult with your tax advisor.