Customer: Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.
Customer: The best structure would be an LLC
Customer: When you choose the tax structure of the LLC, you would want a partnership.
Customer: Do NOT put your rental property in an S Corp.
JACUSTOMER-tuggvc7p- : can you share why not s corp
Customer: If you put your rental property in an S Corp you will have to pay yourself a reasonable salary
Customer: And therefore you will have to pay tax on some of the income, even though you generate a tax loss
Customer: So, the S Corp is not an optimal structure
JACUSTOMER-tuggvc7p- : will i be able to get tax benefits of the loss pass through even with my income level?
Customer: No, you will not
Customer: no matter what structure you choose
Customer: this is true whether you were an S Corp, partnership or LLC
JACUSTOMER-tuggvc7p- : so is real estate treated different than other S corps for pass through loss? I modeled with turbo tax and it appeared the loss passed through and lowered my taxes. Perhaps I did not answer the question correctly
Customer: An S corp rental real estate loss is treated just like any other rental activity loss
Customer: Revenue Code Section 469 was enacted to discourage abusive tax shelters, its impact extends far beyond shelters to virtually every business or rental activity whether reported on Schedules C, F, or E, as well as to flow through income and losses from partnerships, S- Corporations, and trusts.
Customer: That last paragraph was from the IRS
JACUSTOMER-tuggvc7p- : So seems there is no benefit for me move properties into a structure if I cant create any tax advantage. What is the income level where the passive loss is eliminated?
Customer: The passive loss begins phase out at 100,000
Customer: and is totally eliminated at 150,000
Customer: Moving the properties into a structure such as an LLC gives you liability protection JACUSTOMER-tuggvc7p- : From IRS site: Special $25,000 allowance. If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income
JACUSTOMER-tuggvc7p- : I do actively participate - does that make a difference?
Customer: YOu make too much money
Customer: That phases out at $150,000
Customer: you said your income was $250,000
JACUSTOMER-tuggvc7p- : yes
Customer: the phase out begins at 100,000 and is completely gone at 150,000
Customer: the only way to deduct rental losses is if you are a real estate professional. Do you have a non-working spouse?
Customer: You would have to spend more time on rentals than you do your other job, with a minimum of 750 hours
Customer: Are you still there?
JACUSTOMER-tuggvc7p- : what about Material Participation? I do put in more than 100 hours per year. Does that make a difference?A trade or business activity is not a passive ac-tivity if you materially participated in the activity.Material participation tests. You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.1.You participated in the activity for more than 500 hours.2.Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity.3.You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.
Customer: No, it does not make a difference in the case of rental property. Only if you are a real estate professional can you deduct the rental losses if your income is higher than the limit
Customer: This would mean you would have to spend 750 hours per year on rental activities
JACUSTOMER-tuggvc7p- : OK . I tried. Thank you
Customer: and you would need to file a statement to aggregate your properties as one activity
Customer: or else each property you would need to spend 750 hours a year on
Customer: Is there anything else I can help you with yoday?
JACUSTOMER-tuggvc7p- : no. thank you
Customer: If not, please rate my response as "excellent" so that I may receive credit for assisting you today
Customer: Okay, if you would please rate my response as "excellent" so that I may receive credit for assisting
Customer: Thank you for your positive rating. Please come back and see me any time you need a question answered. It was a pleasure working with you today.