All Forum Posts by: Felicia West

Hi Felicia,

It sounds like you’re diving into the tax benefits of real estate, which is great! Here’s a breakdown:

For real estate investors, the $25,000 Real Estate Loss Allowance is available if your modified adjusted gross income (AGI) is less than $100,000. This allowance lets you deduct up to $25,000 in passive real estate losses to offset other income (like W-2 wages). However, once your modified AGI is between $100,000 and $150,000, this allowance begins to phase out. Once your modified AGI exceeds $150,000, the allowance is fully phased out, meaning you can no longer deduct these passive real estate losses. If your adjusted gross income is between $100,000 and $150,000, you can deduct up to ($150,000 – Your Income)/2.

Since you and your husband are high-wage earners (assuming your income is over $150,000), you would not qualify for this loss allowance unless you can qualify as a real estate professional. A real estate professional can use real estate losses to offset W-2 or other income, but you would need to meet both the:

1. 750-hour rule – You must spend at least 750 hours per year in real estate activities.

2. 50% rule – More than 50% of your working time must be spent on real estate.

Since both of you have W-2 jobs, it might be difficult to meet these requirements unless one of you dedicates significant time to real estate.

Another option could be buying multiple rental properties. While you can’t use real estate losses to offset your W-2 income, you can use losses from one rental property to offset the income from another. Over time as rental income replaces earned w2 income, if one spouse quits their W-2 job to focus on real estate, that spouse could qualify as a real estate professional, allowing you to use real estate losses to offset the other spouse’s W-2 income.

Hey, yes, you are partially correct. Passive losses cannot be deducted against ordinary income. There are a few exceptions to that. One being you are allowed losses up to $25,000 to the extent your income is $100,000, and then that $25,000 is limited up to the point you hit 150k. After 150k passive losses would be disallowed and then carried forward to be used against future passive income. You would only receive the full amount of losses in the year of a sale. Another is qualifying as a real estate professional. But very unlikely with W2 income and a full time job.

But this is an awesome concept as you could basically collect rental income for several years and never be taxed on it due to passive loss carryforwards if those build up. 

Feel free to reach out. I'd be happy to discuss your situation and answer any questions to your situation.

Hey Felicia, 

At a high level you’re correct that when you and your husband’s income exceeds certain thresholds (over $150,000), passive losses from rental properties, including depreciation, can’t offset your W-2 income unless you or your spouse qualify as a Real Estate Professional (REPS). However, even if you can’t use the depreciation to offset your W-2 income, you can still use it to offset rental income. Depreciation helps reduce the taxable rental profit, potentially bringing it to zero or even creating a loss, which can carry forward to offset future rental income or other capital gains.

For high wage earners, other tax strategies could include leveraging cost segregation studies to accelerate depreciation on rental properties through bonus depreciation, taking advantage of tax-deferred exchanges (like a 1031 exchange), or maximizing deductions related to property expenses (mortgage interest, property taxes, insurance, repairs, etc.). If you do eventually qualify for REPS, you can use real estate losses (including depreciation) to offset your W-2 income, which can lead to significant tax savings.

Hi Felicia - For high-wage earners, the ability to use rental losses (including depreciation) to offset W2 income is limited. The IRS considers rental income "passive," and losses can only offset other passive income unless you qualify as a Real Estate Professional. If your modified adjusted gross income (MAGI) is over $150,000, you typically can’t use rental losses to offset W2 income.

But you can still use depreciation to offset the rental income itself. For example, if your rental generates $25,000 in income and you have $10,000 in depreciation, it can reduce your taxable rental income to $15,000.

Happy to discuss this further.

Hi @Felicia West depreciation is generally considered a passive loss when it comes to real estate (with a couple exceptions) so it can be used to fully offset passive income from your rental properties. It’s a fantastic tax advantage.

Happy to chat with you further 
 
 

A lot of people on BP THINK they know the answer to that one. I'd pass that by a CPA or Enrolled agent who will answer you with "it depends". 

But, it will be an authoritative "it depends".

Tax write offs on their own are fun for speculation, however, a high income individual has other things going on that affect the answer.

You need to find an agent who is an investor and show you what properties will cash-flow and what they did to get started. Let me know how I can help!