Quote from @Sean Graham:
Quote from @Stephen Nelson:
As long as you satisfy these requirements—material participation, at-risk basis, and you do not exceed the yearly business loss limitation—any allowed nonpassive loss can be used against any class of income reported on your return, including portfolio income.
I’d love to be wrong here in all honesty. My firm does cost segregation, not tax prep, so it would certainly be beneficial if cost segregation can create real estate losses that can be used to offset portfolio income if someone meets REPS.
Side note, ChatGPT will tell you whatever you want to hear and will change its answer if you push back enough.
We're confusing multiple related concepts here, hence you're both right.
Cost segregation creates (a temporary, one must remember!) loss attached to your real property. Sean's Step 1 job is done at this point. Here's your cost segregation report, you have losses, congratulations!
Then step 2: these losses come to us accountants, and we have to apply them to your taxes. If they fit your situation, and we can apply those losses - great, you win. If they do NOT fit your situation, and we cannot apply them - oops, you did it again.
We have 3 common and distinctly different situations as to when we can or canNOT apply these cost segregation-triggered losses. Actually, more than 3 situations, but these 3 are the most common.
1. Regular rental properties, without special situations in #2 and #3. The losses are considered passive. They can only offset other passive income (if you have any), and plus you may have a restricted window to offset other income if your total income is below $150k. Since portfolio income is not the same as passive, you cannot offset portfolio income here, except maybe for that limited income-driven window.
2. Regular rental properties, but either you or your spouse qualify for REPS - Real estate professional status. Then the losses (with some conditions, of course) become nonpassive. They can offset any other income, including W2 income and portfolio income, and without income-based restrictions.
3. STRs - short-term rentals. Provided that you meet various important conditions, such as average stay, material participation and personal use - your STR losses also become nonpassive. It works similar to REPS in #2, although REPS is NOT needed with STRs. Your losses can offset any other income, including W2 income and portfolio income, regardless of your income level.
I only gave a very cursory introduction, because there's a lot more fine print, gotchas and various special situations. It's very risky to draw conclusions from such a generic overview without consulting a tax expert like me, one-on-one. Your mileage...
