tips on getting tax on regular income by real estate investing

[Prash Manohar]

Hi all, looking for some advice on how to get tax break on regular job income by buying real estate w/o having LLC or meeting 750 hour real estate hours invested?

[Diane E.]

If your modified adjusted gross income is below the phaseout amounts (generally $150K married filing jointly, $100K single) you will probably qualify for some or all of the special $25,000 allowance for deducting rental property losses, and you don't have to be a real estate professional.  IRS Publication 925 discusses this on page 4: https://www.irs.gov/pub/irs-pd...  But note that you have posted this question on the Notes forum, and note income is generally taxable as ordinary income without tax advantages.

[Lamont Chen]

@Prash Manohar

Found a pretty good article on BP which may help explain better.

https://www.biggerpockets.com/...

[Prash Manohar]

Thanks @Lamont Chen, but article doesn't talk about how it can help save your regular job income tax. I do understand how one could avoid paying taxes on rental income but not on regular job income.

My AGI is way higher than 150K per IRS guidelines for any tax benefits so not sure if there is any way out.

[Bob Norton]

@Prash Manohar Since your AGI is greater than $150k, you would not get to deduct real estate losses against your regular job income for the year.  The losses will be suspended and can be used to offset rental income in the future, or can be taken in future years when you sell the property.

[Prash Manohar]

@Bob Norton my wife's AGI is < 150K. If she owns the rental property so could she deduct losses against her regular W2 income? Also does the 25,000 limit apply to individual rental property or is it for multiple properties? We both file jointly. I know for a real estate professional even one person could claim losses against entire household income.

[Bob Norton]

@Prash Manohar The AGI limit for fully deducting rental losses is $100k and the rental loss deduction is partially deductible up to $150k.  If you file separately, then the limit is $75k.  Your rental losses will be suspended and can offset future rental income, so you don't lose the losses, you just can't use them to reduce your earned income if your AGI is above these limits.

The only way to fully deduct your rental losses is by qualifying as a real estate professional.  This is a two part test.  The first part is rather easy and its that you spend more than 750 hours working in your real estate business.  The second part is difficult for taxpayers with full-time jobs and the test is that you have to spend more than half your working hours on your real estate business during the year.  If someone works a full-time job at 2,080 hours during the year, then they would have to work an additional 2,081 hours in their real estate business to meet this test.  

[Prash Manohar]

@Bob Norton thanks, still not clear. We file taxes jointly. My AGI is > 150K, my wife's is 100-150K, combined household is > 150K, so if the rental property is owned by my wife, would she be able to qualify for the 25K to offset rental property losses against just her income ?

[Bob Norton]

@Prash Manohar Unfortunately, no.  Whether your file jointly, or separately, your incomes are presently too high to deduct rental losses from regular income.

[Chris Seveney]

@Prash Manohar

Typically the tax benefits with real estate are not tied to your existing earnings from a w2 job but based on depreciating the asset to lower your tax basis on the net proceeds.

Best to ask this question in the tax forum not here as maybe a cpa can shed better light

I am not a tax professional but work with a lot of people who are smarter than me who are able to work the tax code to a T, so take my advice with a grain of salt.

[Basit Siddiqi]

@Prash Manohar

You shouldn't think that just because you can't offset it against your other income(W-2) that there is no benefit in real estate.
Your real estate investments are hopefully cash-flow positive will hopefully not increase to your tax burden because of being able to depreciate the property.

I.E. You are cash-flow positive $1,000 on your property for the year. If your depreciation is at least $1,000, you will not pay any additional federal or state taxes.