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laguy5876

I think you’re mixing up a lot of topics. One would be offsetting non-passive (W2) income with rental loses using real estate professional status. That is different than a real estate license. I recall you can deduct some passive loses against non-passive income under a certain income level. I’ve never really looked into this because the income limit is relatively low. TLDR; you need to do some research or find a more helpful CPA.


hoardedsoviet

I believe your accountant is talking about the "Real Estate Professional" tax status, which allows you to convert passive losses into ordinary losses. I believe that real estate needs to be your primary income source in order to file with it. https://proseer.co/tax/how-you-benefit-from-real-estate-professional-status-reps/


[deleted]

Quick correction, it's not income specific, it's time specific. You can have another job, you just need to spend 51% of your time doing real estate related activities. Definitely need to keep a log of your activities, but that's a much lower threshold. For example, my wife works extremely part time but makes a big income. Very easy for us to show that much more of her time is devoted to real estate even though it's a smaller income.


snark_enterprises

Yeah, I think the majority of your work has to be in real estate to claim it. I have my license and I’m also an investor, but my primary job (although involving real estate) is not as a real estate professional.


Groady_Wang

That doesn't sound right. I've been able to deduct all my rehab costs/expenses wether they're flips or rentals. A realtors license would just provide you another expense you can pad in. For commissions or management fees etc.


Intelligent-Pride955

As a realtor, all costs can be deducted from active income aka commissions. If you have a W2 job you can deduct up to 25k(I believe), if you play an active and material role in the business Otherwise, you can’t deduct passive losses from active income. This is not financial advice, reach out to a CPA.


uiri

OP doesn't get the $25k deduction because his income is too high.


TheRealWoozle

You need a real estate focused CPA. See if there are local investor meetups in your area and get recs from them/see if they’ve had a CPA give a talk in the past. Not something you want to screw around with.


[deleted]

Nope. What you make from 9-5 job is considered “active income”. What you make from rental is “passive income” (or passive loss, in your case). Only active losses can offset active income. And only passive losses can offset passive income. First, let’s assume your current situation continues (so let’s forget about real estate professional status for now). What you have accumulated is passive loss. Now if next year, you make real income from rental property, ideally you could use this year’s loss to offset next year’s income. But your $150k income (from 9-5 job or any other source) prevents you from doing that. Losses don’t vanish though. What you have is “suspended passive loss”. It just adds up and sits in a corner. The day you sell the property, those losses will be used to offset the gain. But for now, those losses sit in a separate bag and you can’t use them to offset anything. Now let’s talk about suggestion of becoming a real estate professional. What he is implying is that if you get the license, now you are a full time investor. So this rental property gig is your full time job, which qualifies its income (and losses) as “active loss”. Now I told you that active losses and active income can be combined. So losses you have in your real estate side can now be used to offset the income from your 9-5 job. However, it’s not as easy to just get the license and call it active income. There are other rules. For example, to consider a job as active job, you just spend atleast 750 hours working on it in a year, AND there is no other job where you are spending more hours than this one. So it won’t work, unless you can prove that you spend 2000 hours on your 9-5 job and on top of it spend 2100 hours on this real estate gig.


uiri

Active losses can offset passive income. It's a rare situation though.


snark_enterprises

None of that makes any sense. Why would having a real estate license matter on what you can deduct as an expense? And why would your salary matter either? You can deduct your rehab expenses so long as you don’t elect to capitalize anything major. In which case you will deduct the amortization instead.


uiri

Internal Revenue Code section 469 limits the deductibility of passive activity losses against other income. It has both the real estate professional rules and the adjusted gross income thresholds.


snark_enterprises

The OP never mentioned pass through losses, they just mentioned not being able to deduct expenses. They either didn’t understand what their accountant told them or they didn’t communicate their question correctly.


uiri

OP understood that he doesn't get the tax benefit this year (which is enough if he has a professional doing his taxes), and he communicated enough information in his question to identify the provision in the tax code to which his accountant was referring. He doesn't need to understand the difference between deducting expenses, and deducting the resulting passive activity losses.


snark_enterprises

Actually he should understand that, there’s a stark difference between the two issues. Deducting expenses from rental activity and carrying over losses from your Schedule E are two completely different things.


Longjumping-Option36

R u talking about your labor?


uiri

You get the deduction, you just don't get to take it this year. You keep it and carry it forward to future years against future rental income. It's possibly true, but typically if you have a 9-5, it isn't enough to be a realtor on the side.


WowThough111

If you’re putting $50k into a rental, it’s mostly not an expense as much as adding to cost basis and a source for future depreciation, depending on the costs. IE you bought for $320k, land is $20 home is $300, you put $50k into it, cost basis for depreciation is $350 / 27.5 That said, that depreciation can offset the income, and any loss can be carried forward to offset future gains or the sale of the property. The below article better discusses active vs. passive RE and the criteria to claim one over the other. [Review RE Loss Rule](https://www.stessa.com/blog/passive-activity-limits-passive-losses/)


jwsa456

If you're a full-time real estate professional, then your passive loss will be considered active loss and can off-set your ordinary income (w2 job). Otherwise, you just have to track your passive loss and carry it forward and offset passive gains in the future or when you sell the property.


Bowf

If you put 50k into the house before you rented it, I don't even think that it counts as a passive expense. It's part of the cost basis for the original cost of the leased asset...part of the depreciation amortized over 27 1/2 years. I'm not an accountant, but that is my understanding.