All Forum Posts by: William C.

I just visited with my CPA who is very good at REI and does such himself. He explained that above the $150,000 threshold the loss becomes a "suspended loss". By not claiming these losses then I don't have to account for how many hours I work at REI. In other words I don't have to prove that I can have a high income job and work alot of hours and still have the time to run my rental business. These suspended losses will accumulate and then when I would like to sell some real estate that has equity, I will be able to use these suspended losses against the equity and essentially pay that much less in capital gains. Wonderful news, as I don't need the money back in taxes now but sure will enjoy later in retirement when I contemplate selling for profit.

@William C., The deduction against W-2 income starts to fall off above $100,000 and is completely eliminated at $150,000.  You can still use it to reduce taxes on your rental income, and anything you can't use "this" year gets carried forward indefinitely into future years.  So you can "bank" the loss to help shield rental income once your property is 100% depreciated.

That's my understanding anyway.  I recommend hiring a CPA who has experience working with REIs.

@William C., I don't know how you file your taxes, but if you do them anything like mine you have at least two sections.  One is the standard 1040 form for W-2 wages.  Line 1 is wages, salaries, and tips. Line 3b is qualified dividends. Line 8 is Other Income, which includes your rentals.  The other section is the Schedule E for rentals that show rents less expenses less depreciation = gain or loss.  This carries over onto your 1040 and is used to raise or lower your total income, and the result of that calculation plus whatever other credits or perks you qualify for via the tax code is your AGI.

Let's pretend you have a job making $100K a year.  Normally, you would owe taxes on that amount.  But....

Let's also pretend you have a rental that shows a paper loss of $10,000.  

Line 1 ($100,000) + Line 8 (-$10,000) = $90,000 AGI.  You would owe taxes on that amount.  $10,000 from your W-2 job effectively becomes ineligible for taxation.

The same is true if you take a loss on other types of incomes.  Let's say you bought stock for $100,000 and sold it during the Covid-19 slump for a $10,000 loss.  You can use that investment loss to reduce your W-2 wages from $100,000 to $90,000, but only if you actually sold the stock for less than what you paid for it.  If you hang onto the stock, that is only a paper loss and doesn't count.

Again, real estate is beautiful: we get to take paper losses caused by depreciation without selling the asset, while ironically the value of the asset is probably going up each year instead of down.

@William C., in short, yes.  That is one of the beauties of real estate investing: the loss helps offset other income.

But...be clear on this...it is dumb to operate rentals at a loss purely to lower taxes.  That is like paying someone $1 to avoid sending Uncle Sam a quarter.  The only way this really works as a deliberate strategy is if your PAPER loss (i.e. depreciation) cancels out income in other areas.

Most of my properties show a loss after depreciation, which carries over to my AGI (Adjusted Gross Income) and reduces my overall tax liability on those earnings.  But in fact, they are putting cash into my pocket each month.

You can still recoup a benefit from taking actual, cash losses on Real Estate if you have a bad year or a lot of repairs, or if it's the first or second year of ownership and the project hasn't become profitable yet due to expenditures on upgrades that increase the value of the property, but ultimately your goal with investing should be to make money, not lose it.  However, if you take a loss, deducting that against other income helps soften the blow.

The most important one to me is cash-on-cash (CoC). That tells me exactly what [cash flow] return I'm getting on the money I invest. That's really what matters the most. But I use cap rate also in the more initial phases of shopping around... kind of the first line of defense--get a quicker gauge of where a property falls on the returns spectrum. Plus it's good to know if I were to ever own it outright anyway. But that's definitely the faster starting point. While I'd love to think about ROI, I don't because the minute you start analyzing returns outside of the direct cash flow, you're immediately into speculation (ex. property value appreciation, presumed increase % of rents annually, etc.). I don't want to trick myself, or mislead myself, on my returns should any of those speculations not pan out. So I prefer to just consider any of the speculative returns as bonuses to my bottom line. Helps me in staying more conservative and not chasing a pipe dream return that may not pan out.

@William C.30 year dimensional shingles. 

I expect my new roofs to last at least 20 years and A/C about 15-18 years though I do have some units that are older and still working fine. My last few roofs cost me $9500 and A/C units in the 3500-4500 range depending upon size.