[quote=joec]Correct me if I am wrong, so if say my earned income (w-2) in my job is say 155k, however I have a paid and clear rental home I inherited from my parents that is paid off that generates say 30k in income a year (passive).
I also have another rental I own that I do depreciate against and currently, to simplify, say I’m running even to cash flowing. Assuming I depreciate 30k a year for that one, would I be able to pretty much eliminate my passive rental income from the other property?
I haven’t looked at this aspect of the tax code at all since I don’t have any rentals, but my guess is you could since they are the same class (both passive).
It just seems to me that no matter the tax laws, wealthy people will find ways around it to make it more beneficial for them which is now leading me to sorta favor having no corporate tax at all in America to allow re-patrioting of profits from foreign countries to at least put the money back in the US. US companies won’t pay taxes anyways and this actually helps the small business (me) that can’t afford to do these kinds of things.
Just pass the income straight through…
For the guy with the 155k income, maybe it makes sense to do a multi purchase (assuming you have the savings) to generate income in 1 property and another to write off depreciation from both. Not too certain, but maybe some of the slum lords here 🙂 can share what they do.[/quote]
My understanding is that passive losses on one rental can be used to offset only gains on other passive gains, IE gains on other estate.
It’s considered “passive” if you didn’t “materially participate” in in rental activity… (IE you or your spouse aren’t a real estate professional that actively participate”…
In your scenario (again take what I say with a grain of salt since it’s a enginerd talking, not a finance/accountant talking)… Your $30k passive loss incurred on your second property would offset the $30k gain on your first property… But keep in mind if your $30k “loss” was from depreciation, when you sell the property, it is going to bite to in the arse by lowering the cost basis of that property when you sell…
That depreciation loss you claimed is “recaptured” at the time of sales of your property… And I believe the part of the gain from depreciation is subject to what’s called a 25% “recapture” tax if I’m not mistaken…
Also, you might have thought, “what if just avoid claiming depreciation on my property” so I can avoid the eventual 25% recapture tax… But ah yes, that’s the rub in the fine print from the IRS… The rub is the tax law requires depreciation recapture to be calculated on depreciation that was “allowed” OR “allowable”… (section 1250(b)(3))…
In other words, even if you don’t claim depreciation, you’re going to have to pay for the recapture tax when you sell the property anyway whether you claimed depreciation or not. So you might as well claim it…..
You can 1031 exchange it to defer that onto your next property, and keeping 1031 exchanging it indefinitely… but it goes on and on and on, and your next property has a lower cost basis from the depreciation of the previous one you rolled it from,etc,etc,etc…
Where you sort of escape from the depreciation recapture hit..is when you die, and your heirs inherit the property… In simple terms (roughly), when your heirs inherit the property, they get what’s called a “step-up” basis… The cost basis for your heirs of that inherited property ends up being the fair market value of that property at the time of your death… Basically, when a real estate is inherited, it starts with a new basis and new depreciation (more or less)…at least for now, until they change that tax rule too……Of course, there’s the other issue of inheritance tax, but that’s a separate discussion…
Again, consult a CPA if that applies to you.. I’m not an accountant, and if I butchered that in anyway, I stand corrected….
