All Forum Posts by: Lesley Resnick

Passive vs active income is not so much about being a real estate agent, it is meeting the IRS designated real estate professional criteria.  There are a number of criteria, mostly around where your income comes from.  Is your income  w2 from an company or is related to real estate.  If you have a day job that pays the bills, it is unlikely you are an irs designated real estate professional.  You can still take 25k if you actively manage your real estate.

I look at this way, my day job is a real estate broker/agent for other investors and my second job/investment is my portfolio as a buy and hold investor.  

Depreciation on flips is different than on buy and hold.  If you flip, there is no time element in owing it.  Ideally out in 90 days.  However, everything you do is basis and can be subtracted from the profit.    

Buy and hold does have the time element and should be considered carefully.  Its like getting a raise for no more work.  Depreciation is the accounting idea that something is worth less in the future.  Real estate, in realty, does not  follow that concept.  A car is a better example, because it wears out as you drive it.

Within a piece of real estate there are a number of components, appliances, cabinets, landscaping, etc.  They can depreciated on different schedules, the shorter the better.  Doing this adds complexity and can cost you money to set it up.  It can also save you a ton of money.  Here is the rub, if you bought a stable in good condition property how much are the kitchen cabinets worth?  Hard to tell, there are services that will come in and do an assessment.

However, if the kitchen was destroyed in a fire and you replaced it you can take it off your taxes as a cost in the year you did the work.  If you bought a house with a 70's orange kitchen and upgraded it, then you would have to depreciate it.  You could use the standard and do it as part of the house on 27.5 years or on a shorter schedule that is 5 years.  Since you just did the kitchen reno you know the basis as opposed to having a study done to estimate the value of the old kitchen.

Yes, especially if i am going to be doing any reno work.  I want to limit my tax liability as much as possible.  There is a difference between repair and improvement.  Repair can be taken in the year of acquisition and everything else must be depreciated on the correct schedule.  

Since my day job is real estate I can take depreciation against any of my income.  If you are not an IRS termed "real estate professional", there are limitations to passive income topping out at $25k.  I am not an accountant but, have learned a little along the way.   

The other part of the equation that no one has mentioned is depreciation.  It is going to make the difference in weather you pay taxes on the income or not.

Depending on your income level and other passive/active income sources, it could be the most profitable part of the property.  i.e. breaking out the property in to its individual core components for depreciation, which allows shorter schedules than the standard 27.5 years.