By Dave Horwedel, CEO of Torchlight Tax.
Real estate is one of the strongest tools for reducing taxes for the tax-savvy investor.
1031 exchanges can be used to sell real estate and defer the tax on the profits indefinitely. I explain how this works in my video What is a 1031 Exchange?
Cost segregation and accelerated depreciation can generate large paper losses, even when the properties are making money. These paper losses are generally passive. For more on this, check out my video Introduction to Cost Segregation on our channel.
To apply passive losses from your real estate against your active income, you must meet one of three qualifications:
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Active Participation
If your adjusted gross income is below $150,000, you may be
eligible to deduct up to $25,000 in real estate losses against active income,
such as wages or self-employment earnings. You are considered to actively participate if you participated in making management decisions or arranging for others to provide services in a significant and bona fide sense
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Real Estate Professional Status
If you or your spouse spend at least 750 hours per year and over half of your annual working hours in real estate, you could qualify for Real Estate Professional Status (REPS). This lets you treat rental losses as non-passive, which means these losses can reduce taxable income from wages or business profits.
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Short-Term Rentals
Properties rented out for an average of seven days or fewer are treated as businesses. If you actively participate, the losses count as non-passive and can offset any type of income.
Of course, passive depreciation losses, even without meeting these qualifications, can offset passive gains.
But when you combine these qualifications with cost segregation and accelerated depreciation, the result can be massive tax savings by allowing you to use real estate losses to directly reduce your taxable income.
The size of those savings depends on:
- How much depreciation is generated through cost segregation
- Your marginal tax rate
- Your level of active income
Want to reduce your taxes with smart real estate strategies?
Contact Torchlight Tax for a free consultation at 877-758-7797 or email info@TorchlightTax.com.
And if you’re looking for more expert insights, we’ve created hundreds of tax-saving videos and blog articles. Visit TorchlightTax.com or check out our YouTube channel.
Disclaimer: This content is intended solely for general informational purposes and does not constitute professional advice in areas such as accounting, tax, finance, investment, or law. Neither the author nor the distributor accepts any responsibility for actions taken based on this information. The content does not provide a comprehensive overview of any subject. Always consult a qualified professional before making decisions related to your business,finances, or legal matters.
