How do you take Depreciation Loss if you make over $150K?

[andysandp]

I understand that if you make $150K or more, you can't the Depreciation Passive Loss against your Regular Income.

I know you can become a Real Estate Professional to sidestep the Passive loss limitation rule, but then you need to document spending 750 hours on Real Estate?

Do any of you actually do this?

[SeattleCPA]

Real estate losses are passive by definition. And it's not just the depreciation losses... it's anything that creates the loss. (E.g., mortgage interest.)

Passive losses can only be used to shelter passive income. But passive losses get unlocked when you dispose of the passive activity.

If you can't take the loss when it occurs, therefore, the loss accumulates and then you take it later on when you have passive gains (maybe on another real estate deal)... or worst case when you dispose of the property.

Also, as you note: you can sidestep the passive loss limitation for real estate if you're a real estate professional... which is not a "certification" or "licensing" thing but an hours and percentages test. You need to spend more than 50% of your time and at least 750 hours on real estate. (There are also some tricks with regard to these tests... see this linked to blog post I did for Whitecoat Investor for details: http://whitecoatinvestor.com/ten-tax-loopholes-for-active-real-estate-investors/)

[andysandp]

Thanks SeattleCPA!

You said "You need to spend more than 50% of your time and at least 750 hours on real estate."  50% of what time?  How do you spend 50% of your time if you have a regular 9-5 Job?

I'm curious if other Investors document 750 hours of Real Estate.

Thanks!

[sammybiker]

I'd love to see/read more discussion on this.

I remember reading somewhere about a court case with a woman that had a full time job and tried to claim she had also worked 750+ hours on real estate, thus getting around that rule.  It didn't work out for her.  I'll try and find the link...

[Cpa Cat]

You said "You need to spend more than 50% of your time and at least 750 hours on real estate."  50% of what time?  How do you spend 50% of your time if you have a regular 9-5 Job?

That's the rub.

There are a lot of court cases on the issue. It's worth doing the research and reading some of the cases if you actually plan on doing it, so that you can see how people succeed and fail at making the argument that they are a real estate professional.

[SeattleCPA]

Thanks SeattleCPA!

You said "You need to spend more than 50% of your time and at least 750 hours on real estate."  50% of what time?  How do you spend 50% of your time if you have a regular 9-5 Job?

I'm curious if other Investors document 750 hours of Real Estate.

Thanks!

You can't "be" a real estate professional if you have another full-time job. You'll fail the more than 50% of your time test. That's kind of the point...

BTW you should read the first few paragraphs of the blog post I provided a link to earlier. It's written for a pretty high income audience, but the descriptions explain what's what...

[Alim Nassor]

Thanks SeattleCPA!

You said "You need to spend more than 50% of your time and at least 750 hours on real estate."  50% of what time?  How do you spend 50% of your time if you have a regular 9-5 Job?

I'm curious if other Investors document 750 hours of Real Estate.

Thanks!

You can't "be" a real estate professional if you have another full-time job. You'll fail the more than 50% of your time test. That's kind of the point...

BTW you should read the first few paragraphs of the blog post I provided a link to earlier. It's written for a pretty high income audience, but the descriptions explain what's what...

Boy, that sucks.  I know I've spent way more than 750 hours last year on real estate while also holding a full time job.   My schedule gives me 3 or 4 days off a week, and it's not hard at all to spend 15 hours a week when you buy and remodel 4 or 5 houses in a year.

[SeattleCPA]

I'd love to see/read more discussion on this.

I remember reading somewhere about a court case with a woman that had a full time job and tried to claim she had also worked 750+ hours on real estate, thus getting around that rule.  It didn't work out for her.  I'll try and find the link...

Here's one of the cases:

http://www.ustaxcourt.gov/InOpHistoric/BallesterosSummaryCohen.SUM.WPD.pdf

[SeattleCPA]

I'd love to see/read more discussion on this.

I remember reading somewhere about a court case with a woman that had a full time job and tried to claim she had also worked 750+ hours on real estate, thus getting around that rule.  It didn't work out for her.  I'll try and find the link...

Here's one of the cases:

http://www.ustaxcourt.gov/InOpHistoric/BallesterosSummaryCohen.SUM.WPD.pdf

Reading the facts of the case it is absolutely absurd that the petitioners thought they were going to scam their way out of a tax bill.  Even the worst pro-se applicant's I deal with aren't that egregious and flagrant.

Lessons to learn:  If you have property managers doing all the advertising and tenant management for you and the tenants are repairing the property themselves, don't try to bullshit the court that you spent hours upon hours with telephone calls and writing letters and driving to the post office.  They tried to claim they spent more hours with phone calls and letter writing than they spent at their full time jobs, they even worked SIGNIFICANT amounts of overtime at their full-time job (the nurse, not the husband)!!!

I would not have thought people were that stupid - that they thought the IRS agents were that stupid, or that no one really cared and they could just make some shit up on the fly...

Well, the funny thing about the referenced case from my perspective as a tax CPA is they would have gotten audited and lost there... then surely they would have gone to appeals and lost there... and then they decided to take their "story" to tax court and try convincing a judge... and course lost there.

[Cpa Cat]

I've come to the conclusion that 25% of tax court cases are new tax law issues (or novel takes on old ones) and 75% of tax court cases are people being f-ing ridiculous.

[SeattleCPA]

I've come to the conclusion that 25% of tax court cases are new tax law issues (or novel takes on old ones) and 75% of tax court cases are people being f-ing ridiculous.

+1... LOL

[waltworks]

Reading that made my day. 2 hour phone calls, eh? 4 hour parties with your friends where you mentioned you have a house? Repeated over and over and over for the same amount of time while you work super overtime at your other job?

Jesus. How on earth did they think they'd win that?

My conclusion from small claims court is that the situation is similar. 75% of the people there are being total morons. The other 25% (almost all defendants) and the judge are just baffled by the situation. The most entertaining cases are when 2 morons sue each other (I witnessed one that took almost an hour in which the issue was $200 in rent - judge's first comment was "if we all valued our time at even a few cents an hour, we wouldn't be here.")

-W

[SeattleCPA]

Reading that made my day. 2 hour phone calls, eh? 4 hour parties with your friends where you mentioned you have a house? Repeated over and over and over for the same amount of time while you work super overtime at your other job?

Jesus. How on earth did they think they'd win that?

My conclusion from small claims court is that the situation is similar. 75% of the people there are being total morons. The other 25% (almost all defendants) and the judge are just baffled by the situation. The most entertaining cases are when 2 morons sue each other (I witnessed one that took almost an hour in which the issue was $200 in rent - judge's first comment was "if we all valued our time at even a few cents an hour, we wouldn't be here.")

-W

+1 again .... LOL again.

[srob]

If you have an unemployed spouse, they could become a realtor to meet the requirement.

Otherwise you can just carry it forward like SeattleCPA said. I had a passive loss that I had to carry forward for 2-3 years when I first started investing in realestate, but have since used it up and now even pay a little tax on my passive income each year as it has edged into positive territory, due to increases in rents and higher cashflow properties with more equity.

[SeattleCPA]

If you have an unemployed spouse, they could become a realtor to meet the requirement.

Otherwise you can just carry it forward like SeattleCPA said. I had a passive loss that I had to carry forward for 2-3 years when I first started investing in realestate, but have since used it up and now even pay a little tax on my passive income each year as it has edged into positive territory, due to increases in rents and higher cashflow properties with more equity.

Agree with srob's second point (second paragraph) but with regard to first point (first paragraph) you actually don't need certification or a professional license to achieve real estate professional status. You just need to pass the hours of time and the percentage tests. This means that an unemployed spouse just needs to spend the time... roughly 14 hours a week.