The $25,000 real estate loss limit and AGI greater than $150,000
March 23rd, 2007 by KenricLast year was a huge lesson to me for taxes because of these limits. If you should ever choose to sell a property, you need to be very careful of where the sale will put your AGI.
Let’s say you make $50,000 a year and have been happily deducting your $25,000 a year in real estate losses. You decide to sell one property which will have a gain of $50,000. This is fine because your AGI will still be around $100,000. You still have your $25,000 real estate loss to offset your income. However, if you decided to sell two properties instead of one and make a gain $100,000 total you’ve now lost your ability to take the $25,000 real estate loss. So that extra property that you’ve sold for a $50,000 profit is really costing you alot more than you think.
Imagine the first scenario, you’ve made $100,000 and deduct $25,000, now your AGI is $75,000. In the second scenario, your AGI is $150,000. Your AGI increased by $75,000 even though you’ve only made $50,000 more. This is what happened to me. When I put my condos up for sale, I was originally intending to sell just one. However, I got full price offers on both of them so I decided to sell without regard for what it did to my AGI. Luckily, I qualify as a real estate professional so the $25,000 loss limit did not apply to me. However, for most real estate investors who also work a full time job this would be a huge tax planning error.
So I my readers ask this question.
How do people who make over $150,000 AGI benefit from real estate investing? How do doctors, lawyers benefit from simple real estate investing?
I have a few friends who simply get no tax benefits from owning rental homes. Their accountants are no help. Personally, I think they are using the wrong types of accountants. They need people who will give them options, not people who just say that they can’t.
One method is for a married couple to have one spouse become a realtor and therefore qualify as a real estate professional. However, in my friend’s case, both spouses are attorneys and work full time. Here is an article about qualifying as a real estate professional. I don’t think that one can bill the proper hours as an attorney and also spend 750 hours in real estate.
So what can a married working career couple do to lower their taxes?
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It seems that investing through a company also meets this test? But from my vague understanding an LLC loses benefits like the long-term capital gains tax rate? These phaseouts are a real pain. I am guessing most of them came in with the Reagan tax reform that brought in lower marginal tax rates for closing “loopholes”. There are similar limits for stock investments. You can claim trader status there in a similar way to get around them.
By moom on Mar 23, 2007
750 is the minimum amount of time you can claim in order to be considered a “professional”. But really, you need to spend more time at real estate than any other job you have. That is how you get the designation.
I have a W2 and claimed RE Pro this year. I have the time logs to back it up, I will let you know if they try to audit me about it.
By RealOG on Mar 23, 2007
Our household falls into this category and we have a great accountant; smart, aggressive, former Anderson Accounting guy. And…we haven’t cracked this problem. We don’t get any tax benefit from investing (aside from depreciation counting against income on the properties.)
And in my book that’s okay. These loopholes were closed for a reason, keeps people from benefiting from bad investments. So it hurts me on my taxes, but fair enough…what it means is that I have to make good investment and I don’t get any help from tax breaks if things go south.
To answer your question: people who make over $150k benefit from real estate investing by making realistic assumptions, running the numbers, saying “no” to thin deals, and using 1031 exchanges to trade up on a tax deferred basis when an opportunity comes along to sell for a profit.
Good luck! I like the site
By Christohper Smith on Mar 25, 2007
I really couldn’t figure the example you gave. maybe you could reword it.
but let me explain what i’ve done in the past. maybe that might help you.
I had 80k of passive carryover losses from 2005 (because of the 25k/yr loss limit against regular income). I sold 2 homes and netted 60k in 2006. I also had another 20k of passive depreciation losses. So my total losses were 100k. I subtract out my 60k profit and another 25k against my regular income and I still have 15k of losses to carryover for next year!
I also flipped two homes for a 20k profit. I transferred title into my C corp and let it recognise 90% of the gain. I used that money to fund a 401k pension plan combo! I did pay 15% tax on that but now its in a tax defered account for the next 30 years!
If you have a competent attorney, you can split the income so you pay less taxes.
By Wealth Building Lessons on Mar 25, 2007
Wealth Building Lessons,
I’m talking about losing even the $25k limit.
You had carryover in excess of your 25k limit so you were able to use at least 25k in losses. If you make over $100k a year, you begin to lose the $25k loss limit, it goes down to $0 at $150k.
I’m talking about people who work a regular job as an employee. They can’t split their income any other way and if they make over $150k they lose the $25k loss. I was wondering if they are any ways to combat this.
By Kenric on Mar 26, 2007
Would your employer let you work as an independent contractor rather than an employee? That way you could shift that income into a corp.
By HungryBear on Mar 26, 2007
I am a part time real estate agent, and my wife and I have full time jobs. I can pass the 750 hour test, but my full time job makes it so I lose that qualification. My wife and I clear over 150K, so we can not take our rental property “losses”.
From reading this post, it sounds like there is nothing I can do to get those losses. Anyone disagree?
Do these losses carry forward?
If I put my properties into my s-corp, would I be able to use the losses to offset non-real estate income? Can I use rental losses to offset the gain on sale of a property?
By Brian on Apr 13, 2008
I also face this problem with my wife. Combined, we make over 150k. I might be able to get my employer to pay me as a contractor, but it sounds like a pain to ask them. My health ins. is under her employer, but I’d loose my 401k benefit and perhaps other benefits. I have stock options too and I’m not sure how that would work esp. if our company is bought. It’s really frustrating that others get this deduction and we don’t. We have two 3-families and each one is at about a 25k loss since we’re just starting out and there’s a lot of interest being paid right now. I was hoping to get 50k deduction after we bought the second one, netting us about 15k in tax savings, but there was the cap at 25k. THEN WE GOT MARRIED and then we got raises after busting our asses, her esp. through 8 years of college. So yes, we make over 150k and now we GET NO DEDUCTION and owed taxes this year on top of the extra income taxes we pay due to our higher salary and being married. BULLSHIT! :-)
By Gary on Jun 27, 2008
My wife and I are also experiencing the pain of the $150K limit. We own 2 rental properties that pretty much break even on a monthly basis (rent covers the mortgage payment). However, we recently had to buy a new Central Air Conditioner ($2200) and a new water heater for one of the properties. The other property needs exterior paint and will soon need a new roof. I’m busting my butt painting the house myself because I can’t afford to pay someone else to do it. Paint costs me about $500. To have someone else paint it would cost about $4K.
We first felt the pain of the $150 limit last year. We’ve both worked hard to increase our salaries and now we feel like we’re being penalized for it. Where’s the incentive to work hard and increase your income? We’re now getting killed by taxes - and the “passive” losses aren’t helping us. When I have to pay for repairs for the rentals throughout the year, it doesn’t feel like a “passive” loss.
I’m sure the rentals are still a good long term investment - but we’re feeling the pain right now.
By Doug on Jul 8, 2008
Can’t the depreciation of 1/27.5 per year be added to your cost basis when you go to sell the property?
For example, let’s say you earn over $150,000/year and therefore can’t take the depreciation each year on your property.
Let’s say you purchased a property 10 years ago for $100,000 and now you go to sell it for $300,000. You would think that your profit would be $200,000. However, if you never were able to take the depreciation due to the $150,000/year income rule, couldn’t you then add that total amount of depreciation to your original cost of $100,000 and thus reduce your profit?
I’m just asking. I have been searching for an answer to this question for quite some time. Does anyone know if this is possible?
By Greg Young on Jul 10, 2008
Depreciation is mandatory. Whether you actually deduct it or not does not matter; when you sell, you must subtract depreciation from your cost. Stop searching and just call the IRS.
By knuckle_headed on Jul 11, 2008
The depreciation not deducted for all prior years needs to be included in the “suspended” write-off’s. Deduct suspended write-off’s in the year the property is sold. Use the cost + imporvements - depreciation formula to compute the gain on the sale. The gains is taxed at 15% if owned more than one year; the suspended write-off’s are deductible at your ordinary tax rate.
By Bob Parrish CPA on Jul 18, 2008