How to shelter K1 proceeds passive income?

[potbellypigger]

Any recommendations on how I can reduce my taxable income on K1 proceeds without really incurring loses.  I have passive K1 income from my surgery center.  Thought about solar for nonprofit groups, where I put up solar tax federal and state tax credits and sell power to them.  Also real estate, depreciation is recaptured at 25% instead of 39.6%, and often the proceeds you receive are a return of capital, so on sale gains are capital gains. Anyone else have any ideas?

[NJDoc]

I'm in the same boat. Surgery Ctr K-1 income has been good over the years, and has/will pay for a large portion of my kids education and post grad education.

Obviously that income is not in a tax favorable situation. As noted by my posts I'm a fan of real estate, as for many years cash flow will be very sheltered by depreciation, and at reversion as you correctly noted there will be a combination of depreciation recapture and  cap gains taxation. Of course if you are in the right situation you could always 1031 exchange, and continue to defer the taxation.

[jfoxcpacfp]

Sheltering passive income is much easier than using passive losses because non-passive expense will reduce passive income, but passive losses must be offset by passive income until the property is sold. So your problem comes down to finding an activity that will reduce your taxable income, in general, but that is not throwing money away. As you have already recognized, the obvious solution (imo) would be more rental real estate - as it grows in value, it throws off losses in the early years.

The only way a 1031 exchange defers taxation is by exchanging rather than selling and will not help with income from the operation of the real estate. And, of course, the basis of the property you receive in the exchange is the basis of the property you have given up so you are depreciating a lower amount.