Tax Implications Of >$150k Income On Rentals..
I've seen it mentioned several times that there is no immediate tax benefit resulting from the depreciation of a property if your income is greater then $150k. For those of you in this scenario, what have you done, if anything? Would an LLC or CORP help?
I assume I would still receive other tax benefits associated with repair and maintenance of the property.
TIA 4 help... TLL
The depreciation will still lower the taxable income of the rental units in the same way that repairs expenses do. In other words, you may still show a paper profit even after adding in the depreciation expense.
Now, if your rental property shows a loss and because you make over $150K in w2 income, you will not be able to use this loss to offset your W2 income.
It is my understanding, though, and others please correct me if I am wrong - that these losses can continue to be carried forward and used in a year where you may not have $150K in W2 income.
Correct you don't lose the loss carryforward. See if the employer has a deferred comp plan to reduce your w2 income. It works.
Generally, you can deduct up to a $25k loss per year on your rentals and offset other income. If your gross income is between $100k - $150k the $25k get phased out and no loss is allowed above $150k. This applies regardless of what expenses generate the loss - depreciation, repair, interest, etc.
The loss is carried forward until:
1. your income is lower and allows you to take some of the $25k,
2. it can be used to offset income generated by your rentals, or
3. you sell your rental in a taxable transaction.
Hi Blueford: On your point #3 - Does that mean that if you sell your rental and have a gain of $50K and you have unused losses of $20K, that the taxable event now becomes $30K?
Yes, as long as it's a taxable transaction, not a trade or conversion to primary residence. (I'm guessing with a trade the losses would carry over to the new property but not 100% sure)
Off the top of my head I'm not sure how the carryover losses, depreciation recapture and captal gain all interact, since they are at different tax rates, but you definitely free up the unused losses when you sell.
I'm not sure if the laws have changed, but you used to be able to treat all of your rentals as one "activity" and if you sold one, you could free up losses on other property and offset the gain.
Quote:Off the top of my head I'm not sure how the carryover losses, depreciation recapture and captal gain all interact, since they are at different tax rates, but you definitely free up the unused losses when you sell.blueford,
Here is my take. In a taxable sale, suspended losses are added to the basis of the property sold. Since the basis is increased by the amount of the suspended losses, the result is a reduction in the taxable capital gain. Depreciation allowed since 1997 is still recaptured in full at the 25% recapture rate.
If you qualify, IRS code for DEALER allows you deduct all loses and not have to consider income.
The regulations talk about number ours spent engaged in real estate..This can include, research, courses etc.
[addsig]
Thank you for all the replies! In a nut shell, using rentals to reduce my income tax burden isn't going to help me on an annual basis until I sell or make less than $150k? I need to reduce my tax burden significantly.
Do you have kids? I have an investor who did a deal with me where the property was done in the kids names, the income went to them. Over five years we transferred about $250,000 of income from his high tax rate to the kids lower one.
Lots of such opportunities are available.
that must have been acouple years ago, you can transfer some income to your kids, but not much anymore...
No kids yet.
Quote:I need to reduce my tax burden significantly.
TLL,
Talk to your financial planner about Low Income Housing LP investments that return as much as 150% of your investment in the form of tax credits. Of course you won't realize the full benefit of the tax credits without net passive income to offset, but the tax credits could reduce the annual IRS bite better than rental property.
not sure if this will work but here goes.
hire a financial planner/tax attorney.
form a C-Corp & LLC.
move the properties into them use the rental income
to pay yourself a salary which u put into ur C-corp's Sole 401k.
eventually u'll buildup enough money in the 401k to buy houses through it. (401k pays downpayment, LLC signs loan) i have a friend who does something like this. again i'm not sure how this actually helps or whether it works, but if u find tax attorney, he might be able to help u.
i believe it has to be a self-directed IRA and not 401k
no, its a sole 401k. like i said this is def. not a do-it-yourself deal.
you NEED a tax attorney for this.
at 3.5k/yr it'll take too long to put any money in an IRA. plus its difficult
to split ownership between IRA and your LLC.(from what i've heard)
much easier split is with 401k and LLC.
If other non real estate business income over 150k ,are there any advantages to being an occupant of the property (non residential) in which I would recieve rent from my other business ?
Does it matter if he is a real estate professional and what exactly qualifies him for that status
Try stating yourself as a Real Estate Professional next time you do your taxes. I've also been fighting with this for years as my regular income grosses over $150K and all real estate activities result in only 'passive' losses. If you can show that you put in at least 750 hours per year AND spend 50% of your time in the 'real estate trade' (not including re lawyer or re mortgage broker, etc), then you can qualify for 'active' losses and deduct 100% of all losses/depreciation/expenses/etc against your ordinary and re income. Do some searches on Yahoo! for this topic....or www.IRS.gov...
plastik,
When your full time job takes around 2080 hours per year, the 50% rule requires at least 2081 hours of your personal services time devoted to an active real estate activity to qualify as a real estate professional.
Pretty tough to do part time when you have a full time job. Additionally, managing your own rental property does not qualify as an active real estate activity.
Good points but debatable. Managing your own properties certainly DOES apply the hours to 'qualify.' As a matter of fact, the IRS even lets you use a management company and STILL qualify as long as have an active role in setting the rent amount, qualifying the tenants, are at least an X% percent owner in the property, and other items.
I currently own as investement property a condo in Seattle, a house in AZ, a house in TX, 2 4-plexes and a duplex in MO that are all managed for me. Last year I qualified as a 'real estate professional' while working as a sales director for a high tech company. Remember, what's 'half your time?' That could be defined as any amount of time. The IRS code does not specifically say 750 hours AND 1/2 your time, but, even if it did, 750 hours per year is only about 2 hrs per day or 14 hours per week. I spend numerous hours searching, purchasing, talking, buying, remodeling, mailing, etc about real estate and intend to submit my taxes the same way again this year.
I can also say that the lawyer I have in Seattle is very in tune with this. We've planned this out very carefully for each year and every year it becomes more and more defendable since I'm continuing to purchase more property. By the time any audit were to hit (post April 05), I'll have 4 more houses, hence, making it even harder to say I'm not a real estate pro. With all the work I do in the evenings and weekends surrounding this, it'd be hard for anyone to argue with.
I'd be interested in others input if they've ever had this questioned.
Quote:Managing your own properties certainly DOES apply the hours to 'qualify.' As a matter of fact, the IRS even lets you use a management company and STILL qualify as long as have an active role in setting the rent amount, qualifying the tenants, are at least an X% percent owner in the property, and other items.You are quoting the rules for active participation in your passive income activity. Active participation and at least a 10% ownership interest in the property is required before you can take the $25K net passive loss allowance against your ordinary income -- subject to the $150K income phase out rules.
Please understand that a rental property operation is, by default, a passive income activity regardless of your level of active participation. Real estate professionals are required to materially participate in an active real estate trade or business. Material participation is quite a bit different from the active participation rules you cite.
Quote:Last year I qualified as a 'real estate professional' while working as a sales director for a high tech company. Remember, what's 'half your time?' That could be defined as any amount of time. The IRS code does not specifically say 750 hours AND 1/2 your time, but, even if it did, 750 hours per year is only about 2 hrs per day or 14 hours per week. I spend numerous hours searching, purchasing, talking, buying, remodeling, mailing, etc about real estate and intend to submit my taxes the same way again this year.Any amount of time -- not hardly. The IRS does nave specific requirements which don't allow you to just take any amount of time into account. Here are the IRS rules for qualifying as a real estate professional extracted from the IRS website. You qualified as a real estate professional for the year if you met both of the following requirements.More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated, AND,
You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Note that the minimum material participation requirement is 750 hours AND that 750 hours must be at least 50% of all the personal services time you spent in all trades or businesses. According to my arithmetic, a full time job generally takes 2080 hours per year. To meet the 50% rule, your material participation hours in an active real estate activity must exceed 2080 hours during the year.
It is a little hard for me to believe that you genuinely qualified as a real estate professional when you don't seem to have any active income from a real estate related activity.
Quote:I can also say that the lawyer I have in Seattle is very in tune with this. We've planned this out very carefully for each year and every year it becomes more and more defendable since I'm continuing to purchase more property. By the time any audit were to hit (post April 05), I'll have 4 more houses, hence, making it even harder to say I'm not a real estate pro. With all the work I do in the evenings and weekends surrounding this, it'd be hard for anyone to argue with.Unless your lawyer is a tax attorney, I question how well he is in tune with all this. Even if s/he is a tax attorney, I question his/her understanding of this topic. After your audit, please come back and tell us how it came out.
By the way, I hope your attorney also advised you that when you convert your passive losses to active losses, your profit when you sell your rental property is also active (ordinary) income. You lose capital gains tax treatment.
Print out this post and please have your attorney review my points. If your attorney is willing to draft a rebuttal, please post it in this forum.