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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience:  Over 20 Years experience
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I make $125K in W2 income and have just bought a commercial

Customer Question

I make $125K in W2 income and have just bought a commercial property under a single-member LLC. My question is that with the depreciation on the property, if I end up with a loss, can I use that loss to reduce the tax on my $125K of W2 income? If yes, is there a monetary or time limit till when I can make the deduction?
Submitted: 2 years ago.
Category: Tax
Expert:  TaxWhisperer replied 2 years ago.

TaxWhisperer :

As long as you actively participate in the real estate, you will be able to claim up to $25,000 in losses. This amount "phases out" as your income reaches $150,000. If you make over $150,000 the loss becomes a "passive activity loss" carryforward and carries forward to be used against income or it gets deducted when the property is sold.

TaxWhisperer :

You need to take the deduction now in the current tax year (subject to the carryforward).

TaxWhisperer :

As part of reporting the rental property, you will decide how much is land and how much is building and depreciate accordingly.

TaxWhisperer :

Any questions?

Customer :

so if i make over $150k, then the loss becomes "passive activity loss"and i cannot deduct against W-2 income?

TaxWhisperer :

Correct. It just gets carried forward and gets claimed whenever your income drops below $150K or when the property is sold.

TaxWhisperer :

Note also that the income would be joint income. So if you are married you count both spouse income against the $250 limit.

Customer :

you mean against the $150k limit, not $250 limit

TaxWhisperer :

Right sorry, typo.

Customer :

darn, that won't help then... do you have any suggestions on the best way to reduce the tax liability on W-2 income in a major way, aside from the mortgage interest deduction and dependent deduction?

TaxWhisperer :

When my clients ask me that question (and it's a very fair question), I say "if I knew something that could just change things, I could make a fortune." Of course, everybody else would be doing the same thing, too and they'd outlaw it.

TaxWhisperer :

W-2 income is pretty hard to get rid of.

TaxWhisperer :

The only thing you are leaving out is a large pension contribution.

TaxWhisperer :

But you will get a rental deduction with $125K in wages. So I don't understand what the problem is.

Customer :

problem is that with my wife's income, we're making slightly over $200k

Customer :

so then we cannot deduct immediately, only when income at some point drops below $150k or the property gets sold

TaxWhisperer :

Oh, right, I thought it would good to mention the joint income. Also, please note you get no rental deductions when you file separately (In case you were about to get to that.)

TaxWhisperer :

If my answers have been illuminating, please click accept.

Expert:  R. Klein, EA replied 2 years ago.

As a fellow Texan investor and tax advisor, my recommendation has always been to focus on building wealth and worry less about how much tax dollars you might save.

 

In the long run, the small tax savings are far outweighed by the incredible power of leveraged investments like real estate. You might have a cash loss of a few thousand a year, but over the long haul, you've got someone else paying off hundreds of thousands of dollars worth of real estate for you. On top of that, the property is increasing in value (let's look long-term here).

 

As you are building your wealth, you can also avoid capital gains tax on your investment property, even if you sell, if you wanted to. There are tax concepts called "exchanges" which allow you to keep building wealth without having to pay tax on the capital gain, yet increase your cash flow over time. What a deal!

 

The big picture and wealth creation is much more important than a few dollars of tax savings any day. If you don't think so, I will trade you your commercial building for all the "passive loss" tax refunds you are forsaking in the current years.

 

 

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