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?
Posted in Finances, Real Estate | 54 Comments »
Stumble it!
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
if any one has a good answer to this please post it. I am in the same boat, and its going to get worse with Obama taking over. I am sure that 250k limit will quickly fall to 150k and lower. Thanks liberals!
By Greg on Nov 9, 2008
The $150,000 rule is a huge penalty if you’re married ($150k for single person and married couple doesn’t make any sense, especially if both are working–it s/b $300k for a couple). However, it’s my understanding you can file separately which would likely be better despite some of the other penalties involved (i.e. no standard deduction for filers) as long as the higher income person can take a good chunk of the $25k loss.
By Tim on Dec 31, 2008
My wife and I just relocated and rented out the house we bought the year before. This is our second rental and I was shocked to find out that we can’t take the losses now on them because our combined income is now over $150k. With turbo tax when I click the “married filling sep” it results in a $2k beni, but that is not much relief on $18k in losses. We paid almost $50k in federal taxes last year, how much more does the government expect us to pay?
By Fran on Feb 8, 2009
In the same boat! Over $8000 in losses on a rental property cannot be deducted due to passive loss limitation. Our “modified adjusted gross income” is nearly $140,000 so most of the losses are not deductable.
What if we put more $$$ into our 401K accounts? Will that lower our “modified adjusted gross income” next year and allow us to deduct bigger losses on the rental property in 2009 that we can for 2008?
By Scoyte on Feb 25, 2009
I just got whacked w/ this also. Can anyone tell me when this law went into affect? Thx in advance.
By Brian on Mar 25, 2009
I’m about to relocate and assumed I’d be able to write off the losses. Whoops; guess I was wrong. I did find out that you can increase your 401k contributions to lower your MAGI.
By DH on Mar 31, 2009
I met with my accountant today, and was angry with not being able to take my 25k loss of my rental properties. It’s not his fault, but this was very bad tax planning as I could have lowered my income as a s-corp owner in another non real estate business. Although I did got married and she makes money too, which is a tax disadvantage regarding the AGI 150k rule. My accountant’s advice is to sell my 8 properties. (Bad timing!). Crazy!!! By the way, Sec 8 tenants (our tax dollars) increases your losses (because of excessive damage and no recourse for them) in so called passive income real fast…The lesson, don’t invest in real estate unless you’re a real estate professional or make less than 100k.
By Jose on Apr 18, 2009
If anyone has any advice or other suggestions, please post follow up comments! I would like to crack this puzzle.
By Jose on Apr 18, 2009
Jose, I would suggest that every year you meet with your CPA in June and in December to plan your yearly taxes.
You said you couldve lowered your AGI, can’t you do that this year?
Can you or your wife become a real estate professional in 2009?
By Kenric on Apr 19, 2009
There is nothing you can do. If you make more then 150, your stuck.
If you have a s corp consider buying a vehicle so you can take the 179 deduction… but then that’s a pain just spending more money. I was able to get my agi to just under 150, and you can only take a prorated % of you loss over I think 140 agi, so its a hard one to beat.
By Greg on Apr 19, 2009
Kendric, My wife will not be a RE professional. But I will meet with my accountant, and I am putting up two properties for sale today and see what happens despite the market. I will lower my personal expenses by loaded my wife and my IRA, and a 529 college plan for my little one.
By Jose on Apr 19, 2009
The availability of smaller taxpayers to deduct the interest and taxes on a second home is one benefit.
By Dave on Apr 21, 2009
I’ve been looking into this for a while…if you make over 150k. I ran the numbers through turbo tax, and one way would be to increase the mortgage on your main home. All interest is tax deductible. Then shift that increase in mortgage to a larger down on your rental property. That even after depreciation, you do not go negative on paper. For example, instead of having 10k in interest as an expense on the rental, it gets moved over to your main home which is deductible. I ran this in TT, and it actually saved 1000 off of taxes. Try it out and let me know what you think?
The other way I heard is to use a PIG, passive income generator. Does anyone have one of those?
Or can you buy into limited RE partnership that pays you income, and offset that with personal rental property losses? Because it’s a limited partnership, the income is passive I would think. Anyone have facts on this one?
thanks
-JD
By JD on May 21, 2009
We got hit on this as well. $155K in 08 and with wife graduating med school we should be at $250K+ for 09. I am now confused on why we are invested. I have about $6000 negative cash flow in the rental and can’t write it off. I am now considering gettting rid of it as I now see the rental as a huge liability. Currently it is about $60K underwater so what is the proper way to take the loss?
2nd Question, we are buying a new primary residence now. Is there any benefit to owning a duplex or should this be avoided as well?
By Neil on Jun 9, 2009
The solution is simple people. If knowing for a fact that any 1 party is planning to try to become a real estate investor and owning more than 1 peice is to file married filing seperate and hold the real estate in 1 person’s name. But what american whore is going to approve this? The goal is to avoid at all cost ever reaching $155k in agi. Real the tax laws. My wife and i will be filing taxes seperate and holding real estate in each person’s name. There is no way to ever achieve agi between 2 people of 155k if you understand that assets(+)plus liabilities(-) = owner’s equity. I dont give a damn if you make 1 million in rental income a year someone better show that you have 1 million plus $1 or more in mortgage loans out. LLc’s are only taxed on net worth. hint hint
By Anderson on Aug 21, 2009
Anderson, you have absolutely no idea what you are talking about. We are talking about AGI, adjusted gross income. This has nothing to do with your net worth. Next time look at your taxes and show me where the actual market value of your property or the amount of your loans comes into play for AGI.
AGI is combined total of your salary, interest income, capital gains, net rental income, etc..
By Kenric on Aug 21, 2009
Anderson,
Your reply really gave me a chuckle. It sounds like you’re mixing a little bit of Accounting 101 with estate planning, limits on mortgage interest deduction and a variety of other tax terms you’ve encountered. Thanks for the laugh!!
By Jennifer on Sep 16, 2009
So what’s the plan to eliminate or reduce the phase-out of $150K or ways to reduce your tax bill
By Lee on Oct 18, 2009
Cannot just set up a LLC and write off any loss against AGI?
By fzx on Dec 8, 2009
fzx, no LLC does nothing in regards to tax liability. It all flows through to your personal income tax. LLCs are only for limiting your liability from private people suing you, not from the gov’t.
We’ve been around and around with this. Just feel lucky you haven’t hit the AMT yet. There really is no way around that one, and you lose pretty much all your itemized deductions…
By scott on Dec 21, 2009
You are all kidding yourselves anyway about the benefits of owning rentals that give tax write offs. The ability to claim a loss on a rental stems from 1 of 2 things – a) you lost money – real money – i.e. you paid more in expenses that you got in rent. or b) you have depreciation available – and depreciation is not a ‘free write off’. You get a tax benefit now in exchange for a tax liability later – its just a tax-deferral. If you can’t claim the deprecation due to your income being too high it just carries forward and adjusts back onto the lower cost basis when you sell the property. If your tax rate is the same now versus then, the only difference for someone at $150,000+ AGI is the time value of money. Nothing is actually lost.
By Ian on Dec 29, 2009
Just add all the “expenses” into your cost basis when you sell, rather than taking the expense deductions year after year. The only thing you can’t add to your cost basis are things like ins, HOA fee’s, etc, these shouldn’t add to much and should be offset by your rent income anyway….for mortgage int and taxes, just claim the rental as a second home and deduct these on Schedule A.
By Jim on Jan 21, 2010
So can I take the 25k in losses on rentals PLUS if I sell a property and lose money on that, can I take thoses losses too?
By Zecia17 on Jan 26, 2010
Question. If your combined(husband and wife)AGI is above 150K can you do the following. Have an LLC(owned by husband and wife) which owns a rental property and has money invested in stocks. Can you have the profits of the stocks be offset by the losses of the rental property? This offset would happen within the LLC. Then the net profit or loss would flow through to the personal income tax? Example – Combined AGI is above 150K. LLC has 100K invested in stocks which has end of year gains of 10K. Rental property in LLC has 9K in losses for the year. Can the LLC have a net profit of 1K and this 1K passes to the personal income of the LLC owners(husband and wife)?
By Andy on May 4, 2010
I have several years of passive losses that we could not take b/c of the 150K rule. Can I carry over those losses and apply to future real estate profits or capital gains on the sale of properties?
By BK on Jun 5, 2010
I work part time , other half I am a realestate professional with rentals. Our AGI is over 150k. I should be able to report 14k in rental losses but turbo tax doesn’t seem to recognize I’m a professional…am I missing something here?
By elk5x6 on Jun 23, 2010
People, if you can’t take your passive losses due to the income limitations you simply carry forward your losses. If you never get to take any and you sell your house for a gain, you can use the accumulated losses to add to your basis, reducing your gain. If you ARE under the passive limitations and are able to take the losses the depreciation you take is recaptured at the time of sale and is taxable profit to you. If you’re well over $150K in MAGI every year, there is not way to take the passive losses but you may offset them with any gains. If you are borderline, max out your 401(k) to drive down your MAGI.
By MV on Jul 1, 2010
The only way to get around this AGI limit (if you do not already have a 401k) max it out. If neither spouse has one, open up a Self employed 401k for each, which allows $16,500 tax deferred from each (total $33,000). This will allow part of the deduction if you have a combined income of $150k. There is no other way of getting around it. Best of luck investors!!!
By mc on Feb 11, 2011
Somehow you need to reduce your AGI below $150k. That is the trick. Options include deferring compensation into a nonqualified deferred compensation plan (if your employer permits it), or finding other investment losses that can reduce AGI (such as farm losses or Schedule C losses). In truth, the $150k threshold has not been indexed for inflation. It came out of the 1986 Tax Act and has not changed. Many will find that their rental real estate losses will accumulate over time, and will only be used when they ultimately sell the property. Consider doing that when Congress/Obama increase the individual tax rates (which is coming).
By Tough one to crack on Feb 21, 2011
Any insight would be greatly appreciated!
Recently married, 2010 AGI above 150K. Upside down on rental property by approx $50K. I haven’t had a paying tenant for almost 3 years. Found out yesterday that the $25K I shelled out last year can’t be deducted from my taxes this year. Hubby and I have maxed out our 401K already. Would it be better for me to just write a HUGE check and try to sell the property? I have a few leads on a tenant, but competitive rental income won’t cover half of my expenses. I am not sure if the passive limitations or accumlated losses can benefit me in any way if I sell for a loss???
By Glexpilot1 on Mar 28, 2011
One more question, What if I elected to have my LLC taxed as a 1120s.
By Michelle on Apr 3, 2011
The is really big but I would say economy downfall responsible for it.It shook the economy of whole world but know everything becoming fine and country like USA felling well after get out from it.Nice sharing….
By ladders on Apr 4, 2011
I just got married in October and I have a second home/condo that I have been renting out. Now that I am married our AGI is about 162k and I found I cannot deduct the losses. I have put 120k into it and still owe 280k without the tax deduction I don’t think I can afford to keep it and pay it off =( Any solutions?
By eve on Apr 9, 2011
I am in the same situation. Marriage has its hidden disadvantages as you quickly found out. But love conquers all…they say :-) Sell it for a lost bringing a personal check at closing.
By Joe on Apr 14, 2011
Ok, we figured it out. My wife and I are both professionals and bring in about $260k in W-2 money.
So, what to do about my upside down, loosing money condo? It is frustrating because we lose money every month, and we can’t sell it without going short sale…which we wouldn’t do for moral reasons. But, we can’t sit hear and
Ay even more taxes and something we are legitemetly loosing money on…it’s just crazy.
SO, here is what we did. We set up a separate business by filing for a fictitious name (actually my tax guy did all this we just picked the name). It is a business after all. The bottom line on the business now shows a loss and carries over to my personal return as a deduction.
Since it is a separate return we had to pay for 2 returns, but it still proved worth it.
You can tell me what you think…but I do not feel like this is a tax cheat…simply doing it right. The IRS can’t expect me to pay tax on income I simply don’t get, it’s ridiculous.
And I am blessed to have this income, but in reality…it doesn’t go fas in LA. Our house is 1050 sq ft. Hardly “rich”.
By Neil on Apr 14, 2011
Hey Neil,
I’m interested in what you did. We are in the same boat. Just paid a huge tax bill because 20K rental loss was not allowed as decution due to AGI over $250K. Did you set up an LLC? in which state? We’re in CA as well but i don’t know if CA is the best place to start an LLC.
So will this really lower AGI? How des it affect AMT?
thanks!
jim
By Jim on Apr 18, 2011
We are in the same boat. Smaller Scale. Cannot take the losses on a rental for the last 2 years.
CPA says, the losses from 2008, ’09, ’10 will keep compiling until we can either spread the losses over (don’t know how many) years that we do NOT make over $150K or if I sell, then the losses are a straight deduction from my capital gains. In my case, my property has depreciated to near nothing, so capital gains are keeping me from selling it. Have rented it since 1987….My capital gains are about $50K so I can take losses of $9800 and $12000 off so now CG would be $50K – $21,800 = $29,200. That helps me in the long run (IF I can sell)
By YankeeSC on Apr 22, 2011
Not at the 150k but should be soon. Been maxing out 401k to stay under and looks like the wife will have to as well to stay under 150K. i agree, h/w should be 250k- 300k. 1986 was a long time agon and those making 6 figures were higher up the corporate ladder then compared to where I am now. How do the real rich do it?
By investingGA on Aug 17, 2011
Same boat last year also had to pay AMT what the heck… I wan’t to know what business Neil in Ca set up.. Was it an LLC or 1120s because I thought that real estate in 1120s was also subject to same AGI of 150k when passed through.. Let me know Thanks
By Long Island is expensive on Jan 7, 2012
Looks likes this post has been hit at the beginning of every year since ’07. First time 150k hitter, married but wife didn’t work. Just started tinkering with turbotax and was just floored with the non-deduction. It’s unreal how so little has been inflation indexed over years, most of us are fortunate enough to know how to kick @$$ in the mornings for income, but we’re punished.
By Mike on Jan 16, 2012
Well a lot has changed personally since I wrote in 2009. One unfortunate
Way to combat this AGI dilemma is a divorce like I will be having hopefully next month. Don’t recommend though. Since my two rental properties are more than 60% under, I’m going to short sale. (I can’t afford to wait it out at this pace). Sucks but why keep up with the liabilities, and cut my losses now.
By JS on Jan 16, 2012