Hello. I am a ‘buy and hold’ investor. I am wondering if the mortgage interest and property tax deductions along with depreciation on my properties can be used against my personal income. I have very little money in or out of my real estate business because the money won’t be coming in until I finally sell them and I don’t put much money down to purchase. I currently make 100k gross with my employer and bring home about 70k. I am hoping to use my Real estate deductions mentioned above to bring my net income up to a higher level. (example gross 100k, net 90k).
Is this possible? Can I use real estate deductions against personal income? Thanks alot.
If you own them in your own name, up to $25,000 of passive losses can be used to reduce taxable wages. This deduction begins phasing out for incomes over $100k.
Thanks for the response. I will own all properties in a land trust with my LLC as beneficiary. Can I use a larger amount of passive losses than the aforementioned $25,000 because I own them in a trust and not in my own name? Also, can I claim to be a ‘real estate professional’ and be viewed differently from a tax standpoint?
I will own all properties in a land trust with my LLC as beneficiary. Can I use a larger amount of passive losses than the aforementioned $25,000 because I own them in a trust and not in my own name?
No. The trust is a simply a title holding device with your LLC as the beneficiary. Unless your LLC has elected to be treated as a C-corp for tax purposes, the LLC pays no taxes in its own right. Instead it passes all its income and expenses to your personal 1040. For your rental activity, if your LLC is a disregarded entity, you would report all your rental income and expenses on Schedule E (1040) as if the LLC did not exist, and, you would still be subject to the income limitations for the $25K passive loss allowance.
Also, can I claim to be a ‘real estate professional’ and be viewed differently from a tax standpoint?
In order to be a real estate professional, you must spend at least 50% of your total working hours engaged in an active income real estate activity.
You say you have a full time job which I assume has the typical 40-hour workweek, so, you are spending 2080 hours per year in your day job. To satisfy the more than 50% rule for real estate professional status, you would have to moonlight in your real estate activity at least 2081 hours per year.
Extremely tough to do when you have a full-time job on the side.
From your question I am guessing that you don’t have any rental properties yet, or maybe you just acquired your first property this year. If this is the case, then I will also hazard to guess that you won’t come near going over $25K in passive losses any time soon, nor will you find that your income phases out any of your passive loss allowance until you have a few more properties in your portfolio.
According to the following excerpt from IRS Pub 925, there is a two-prong test.
[i]Qualifications. 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.
[*]You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.
I’m in pretty much the same situation as the original poster, only I don’t have any properties as of yet. I’m just starting to look at properties to hold and rent.
I don’t believe an LLC is necessary at the moment, but should I open a “business” now and track my expenses. Are the expenses I acquire prior to purchase deductible? If I don’t make a purchase this year, are they deductible then?
Are the expenses I acquire prior to purchase deductible?
Yes.
If I don't make a purchase this year, are they deductible then?
Expenses are deducted in the year incurred (spent). If you don’t have any rentals this year, you should deduct them on a Sch C until you have rentals, then they go on Sch E.
Regarding the real estate professional thing, I think you need to be careful that you meet the hours thresholds for an activity.
I.e., there was a case that came across my desk recently where somebody had three properties… if they aggregated the three properties they met the 50% and 750 hour tests… if they didn’t aggregate, they didn’t.
Because they didn’t aggregate, they couldn’t pass the ‘real estate professional’ test.
The election to aggregate activities is made on your tax return.
BTW, I remember where I read about this now…in a newsletter from my malpractice insurance company…they were worried about CPAs forgetting to advise their clients to make the election.
I think this is something you want to check if you’re getting to the real estate professional definition as a “manager” of your own properties
Al Aeilo’s tax goldmine strategies book gives a detailed discussion on qualifying for the RE professional status as well as ways to accelerate depreciation for increased deductions. It also shows ways to structure entities to maximize deductions. He provides many tax cites in case you want to research the info on your own.