Ideas for deducting property losses from W2

[i_have_so_much_to_learn]

Hi there

My wife and I are both employed in tech (W2) and earn 6 figures together.

We recently bought a few apartment buildings (>20 tenants) and would like to maximize the use of our deductions. We know about the Real Estate Professional Status but it appears very difficult to obtain. We could do 1-3 hours of work for the properties per day. The properties are 45-60 minutes away from our home, in case it is relevant. I intend to deduct mileage.

Any ideas how to maximize this tax shelter? Figuring this out would be exceptionally helpful to our family. Open to creating LLCs, etc.

Ref [1]: "Real Estate Professional Status (REPS) is a recognized IRS designation for individuals dedicating more than 50% of their time to real estate trades or businesses while providing at least 750 hours of annual service.": https://www.landlordstudio.com/blog/real-estate-professional-status-reps#:~:text=Real%20Estate%20Professional%20Status%20(REPS)%20is%20a%20recognized%20IRS%20designation,750%20hours%20of%20annual%20service.

[i_have_so_much_to_learn]

Per reading https://biggerpockets.com/forums/51/topics/1062841-reducing-w2-income-tax-by-actively-participating-in-real-estate, it appears that this is a "holy grail" that might not be achievable...

but i'm still open to any advice :).
thanks.

[GilesMM]

If you real estate is experiencing losses, have you considered ways to stem the flow (increasing rent, decreasing cost) or selling?

[i_have_so_much_to_learn]

If you real estate is experiencing losses, have you considered ways to stem the flow (increasing rent, decreasing cost) or selling?

I'm assuming that you are knowledgeable in RE, but RE losses are sort of by design. Between taxes, interest, and depreciation, the losses will last for a long time. The property has excellent cash flow and even a small but healthy cap rate.

[Sibley]

Realistically, your w-2 income and your schedule E rentals are completely separate. Trying to mix them when you shouldn't (real estate professional status) if you don't actually qualify is likely not going to end well.

Also remember that when you ultimately sell the rentals, you will have to recapture deprecation and pay taxes. That can hurt.

Bottom line - you earn enough that you're going to pay a lot in taxes. But you don't earn enough to do all the tax avoidance that the extremely wealthy do.

[i_have_so_much_to_learn]

Realistically, your w-2 income and your schedule E rentals are completely separate. Trying to mix them when you shouldn't (real estate professional status) if you don't actually qualify is likely not going to end well.

Also remember that when you ultimately sell the rentals, you will have to recapture deprecation and pay taxes. That can hurt.

Bottom line - you earn enough that you're going to pay a lot in taxes. But you don't earn enough to do all the tax avoidance that the extremely wealthy do.

Checks out - thanks for the down-to-earth answer. The thing is, I'm happy to try and do whatever it is to qualify - financially it is worth it to me. My wife may leave her job in the next year or two and we are willing to have her go down there every day, or whatever is needed. Just need to better understand the requirements (and if its possible to do today).

But I totally hear you! thank you

[Sibley]

Realistically, your w-2 income and your schedule E rentals are completely separate. Trying to mix them when you shouldn't (real estate professional status) if you don't actually qualify is likely not going to end well.

Also remember that when you ultimately sell the rentals, you will have to recapture deprecation and pay taxes. That can hurt.

Bottom line - you earn enough that you're going to pay a lot in taxes. But you don't earn enough to do all the tax avoidance that the extremely wealthy do.

Checks out - thanks for the down-to-earth answer. The thing is, I'm happy to try and do whatever it is to qualify - financially it is worth it to me. My wife may leave her job in the next year or two and we are willing to have her go down there every day, or whatever is needed. Just need to better understand the requirements (and if its possible to do today).

But I totally hear you! thank you

Essentially, it needs to be a job.
https://anderscpa.com/investing-qualify-real-estate-professional-tax-status/?tag=re&c

[Jon Bon]

If you real estate is experiencing losses, have you considered ways to stem the flow (increasing rent, decreasing cost) or selling?

I'm assuming that you are knowledgeable in RE, but RE losses are sort of by design. Between taxes, interest, and depreciation, the losses will last for a long time. The property has excellent cash flow and even a small but healthy cap rate.

I will push back on this a little. I fully understand that there is a good chance you have a tax net loss, but a cash profit. However the notion that RE losses are by design feels pretty incorrect. Its an investment like anything else. If you are not getting a yearly return on your investment, then it is a bad one.

To your question there are lots of little things you can do. Tools/Materials/Auto/Phone etc can all be moved from your personal taxes to your business taxes. Different rules for different items, but I always have my business pay for tools.

Good luck out there

[i_have_so_much_to_learn]

If you real estate is experiencing losses, have you considered ways to stem the flow (increasing rent, decreasing cost) or selling?

I'm assuming that you are knowledgeable in RE, but RE losses are sort of by design. Between taxes, interest, and depreciation, the losses will last for a long time. The property has excellent cash flow and even a small but healthy cap rate.

I will push back on this a little. I fully understand that there is a good chance you have a tax net loss, but a cash profit. However the notion that RE losses are by design feels pretty incorrect. Its an investment like anything else. If you are not getting a yearly return on your investment, then it is a bad one.

To your question there are lots of little things you can do. Tools/Materials/Auto/Phone etc can all be moved from your personal taxes to your business taxes. Different rules for different items, but I always have my business pay for tools.

Good luck out there

Are you saying that the annual depreciation should be smaller than the rental income minus other expenses? Typically you don't factor depreciation into a cap rate.

[Sibley]

If you real estate is experiencing losses, have you considered ways to stem the flow (increasing rent, decreasing cost) or selling?

I'm assuming that you are knowledgeable in RE, but RE losses are sort of by design. Between taxes, interest, and depreciation, the losses will last for a long time. The property has excellent cash flow and even a small but healthy cap rate.

I will push back on this a little. I fully understand that there is a good chance you have a tax net loss, but a cash profit. However the notion that RE losses are by design feels pretty incorrect. Its an investment like anything else. If you are not getting a yearly return on your investment, then it is a bad one.

To your question there are lots of little things you can do. Tools/Materials/Auto/Phone etc can all be moved from your personal taxes to your business taxes. Different rules for different items, but I always have my business pay for tools.

Good luck out there

There are limits on deducting losses from passive activities. If the goal is to reduce AGI, a passive activity can only help so much. Moving more expenses to the rentals may not help if the loss gets carried forward. But yes, making sure you appropriately claim expenses is smart.

[clarkfan1979]

Hi there

My wife and I are both employed in tech (W2) and earn 6 figures together.

We recently bought a few apartment buildings (>20 tenants) and would like to maximize the use of our deductions. We know about the Real Estate Professional Status but it appears very difficult to obtain. We could do 1-3 hours of work for the properties per day. The properties are 45-60 minutes away from our home, in case it is relevant. I intend to deduct mileage.

Any ideas how to maximize this tax shelter? Figuring this out would be exceptionally helpful to our family. Open to creating LLCs, etc.

Ref [1]: "Real Estate Professional Status (REPS) is a recognized IRS designation for individuals dedicating more than 50% of their time to real estate trades or businesses while providing at least 750 hours of annual service.": https://www.landlordstudio.com/blog/real-estate-professional-status-reps#:~:text=Real%20Estate%20Professional%20Status%20(REPS)%20is%20a%20recognized%20IRS%20designation,750%20hours%20of%20annual%20service.

At a theoretical level, the goal is to overlap your personal life with the business as much as possible to maximize your deductions. I have one example below.

I have a rental 2 hours and 45 minutes from my primary home. I travel to that rental about 4-6 times/year for maintenance and repairs. I deduct the mileage and 50% of food cost. I schedule the trips to the rental be consistent with visiting family that is on the way. They live 2 hours and 10 minutes away and only a 5 minute detour from the highway. The primary purpose of the trip is for the rental. However, I schedule a family trip around my trips to the rental.

The end result is that these trips to visit family end up being tax deductible against the rental because the primary purpose of the trip was for maintenance and repairs for the rental.