The other thing is, because I still have a W2 job and have passive income from dividends, interest, cap gains after tax….I don’t mind buying more properties now that in the short term are mild losses on paper but potentially generate more income in the future when I don’t have a W2 income. You can’t do that with a REIT…
Ideally, right now, while I still have my W2 income, I’d rather do things so my net rental income across all my properties is $0….. so I don’t pay additional income taxes above my w2 income…provided those actions can potentially generate more income for me in the future when i don’t have a W2 income, and my total taxable income is roughly the same or less when I had my W2 income… In theory, I can do this by “racking and stacking” more properties such that rental income now pays for itself so the net rental income is $0 and I don’t need to dip into my W2 income to pay for rental expenses…This allows me to keep my current standard of living and expenses for my own life, while building (hopefully) a larger future passive income stream when I’m no longer working..
Ideally, it would be even nicer if a net rental income loss could be used to offset income from other sources, like a W2 income. If that was case, I would buy more properties and make sure I have a net rental income loss in the short term while I was working, so I could use that rental loss to lower my taxable W2 income…..But the IRS doesn’t generally allow you to do this with the exception of 2 cases…otherwise, your losses are simply carried over to the next year and can only be used to offset rental income in the future, which isn’t very useful in my case. I can make rental income go positive or negative very easily but if it can’t offset my W2 income, there’s no point doing it beyond making it close to $0.
The 2 exceptions where the IRS allows you to use rental income losses to offset other income sources are (to my knowledge, and correct me if I’m wrong people)
1. You can claim you are a real estate professional. But there are strict IRS litmus tests for thi.But if you could claim you were a real estate professional, IE you’re a realtor or broker, than your rental income losses are not considered passive, and they can be used to offset your income elsewhere. https://www.thetaxadviser.com/issues/2014/jul/skarbnik-july2014.html
Disclaimer: I’m an enginerd not a finance guy, this isn’t tax advice. You need to find your own CPA to validate or disprove anything said here. I’m just an enginerd hobbiest that likes to screw around with the system within the legal confines and keep myself from boredom from staring at code all day.
