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Rental Tax Benefits

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  • Rental Tax Benefits

    I'm considering purchasing a rental property. My accountant is in favor of this as he says you can operate this as a net loss and deduct thousands in taxes per year. I was under the impression however that real estate losses can only be deducted if your income is less than $150,000, which it is above. Am I missing something here? Is there an entity you can create that doesn't phase out the rental loss deductions above certain income levels? Thank you in advance.

  • #2
    Maybe don’t buy a rental property in the 90220 (Compton, CA) neighborhood?


    • #3
      Sounds like you know more than your accountant (CPA?)

      If you and/or your spouse is an attending or otherwise high income (def above the level referenced above), I beg you to find another accountant. Unless this one actually is at the other end of the spectrum and is also helping you to establish REP status, discussing cost-seg analysis, etc. A SBUX triple venti non-fat latte says he's not.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #4
        You can't deduct against earned income unless you meet a very particular threshold called "Real Estate Professional Status" or REPS. Just assume you cannot meet it for now.

        If this is an AirBnB that you manage, you spend 100 hrs per year, and nobody spends more time, then you qualify to use bonus deduction and can count losses against W2 income.

        For most people, the advantage is that you can depreciate the property and can count any costs of running the property against the income from that property. You can depreciate ~3.6% of the value of the building against your real estate income each year. Early on you'll probably have losses accrue, and it'll be years before you have to pay tax on the income from the property. That is what most people are getting as the benefit of owning real estate.

        Most of this is honestly tax deferral rather than avoidance, but time value of money and tax rate arbitrage make it very beneficial. If you own the real estate forever, current tax law has this passing to your heirs with no tax ever being recovered. If you trade rental properties, then you can swap without paying that tax through a complex process called 1031 exchange.

        If you continue to grow your real estate holdings, the process actually gets easier and the tax deferred income grows substantially when you pass 5-10 properties. One rental is hard. Ten is busy, but rarely hard.
        Last edited by Molar Mechanic; 02-14-2022, 06:56 AM.


        • #5
          Does your accountant also have you claiming a home office deduction as a W2, deducting moving expenses as non-military, or advise against a Roth IRA at our incomes? If the answer is yes, you might need a new CPA.

          Spouse needs to get REPS, or you can do an AirBnB.