All Forum Posts by: Adam Sieg

I downloaded the REPS Tracker. Its a great tool that lets you categorize and keep track of every minute or hour spent.  You can take pictures of receipts, I screen shot call logs, etc.  but I will say it’s a rude awakening.  It FEELS like I spend soooooo much time doing real estate activities and this app makes me realize my sense of time can be way off.  

The IRS just received a LOT OF FUNDING this year with the intent to increase audits.  Better dot your i’s and cross your tS.  My Tax strategist and their CPAs will not endorse or file REPS status unless you have logs to prove it first. When you get audited, it is a 2-3 year process, too! 

@Account Closed has the right idea but instead of passive income vs non passive income it is passive income vs ordinary income.

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) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation". 

Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation. You hold the asset for five years and it is sold for $150,000. You have $50,000 of capital gain and $20,000 of depreciation recapture. Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.
Now assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation. The new depreciation would first offset the $20,000 of recapture then the remaining $10,000 would offset some of the capital gain from the previous sale leaving you with $40,000 of gain. You would pay 20% tax on the $40,000 and the tax owed would be $8,000 rather than the original $15,000. If you have other passive loss that you have been carrying from other investments, that could be used to further defer and reduce the tax.

Make sure you have enough losses for it to make sense. You greatly increase audit risk and if you make between under 100k with a cap at 150k you already get to write off $25k of losses anyways. 

I'm currently a REPs person and my main goal is to reduce my tax load. The theory to my non expert mind is that there are 2 types of income- passive and non passive. w2 is non passive and you pay a significant amount of taxes depending on your income. WIth REPS you can take your passive losses (i.e. from rental income) and "apply" it to your W2.  I'm doing this with my husband- where he is the W2 earner.