WEBVTT NOTE This file was generated by Descript 00:00:08.209 --> 00:00:11.840 Welcome to Real Estate is Taxing, where we talk about all things real estate 00:00:11.870 --> 00:00:16.869 tax and break down complex concepts into understandable, entertaining tax topics. 00:00:17.440 --> 00:00:21.259 My name is Natalie Kalady, I'm your host, and I am so excited 00:00:21.259 --> 00:00:22.670 that you've decided to join me. 00:00:23.848 --> 00:00:27.718 Hello, friends and welcome to today's episode. 00:00:28.378 --> 00:00:30.778 I am hoping that the topic for today's show. 00:00:31.288 --> 00:00:34.828 Actually comes as a bit of good news to some of you. 00:00:35.428 --> 00:00:39.508 So this show was inspired by a comment I saw. 00:00:39.568 --> 00:00:44.488 And I've actually seen this comment pretty often from investors who have 00:00:44.488 --> 00:00:47.968 gotten this idea that unless you are a real estate professional, that you 00:00:47.968 --> 00:00:49.828 can not use losses from your rentals. 00:00:50.338 --> 00:00:53.368 I've seen multiple people respond and say, don't worry about it. 00:00:53.368 --> 00:00:56.128 If you're not real estate professional, you don't get to use the losses. 00:00:56.428 --> 00:00:56.998 Too bad. 00:00:56.998 --> 00:00:57.628 So sad. 00:00:58.228 --> 00:01:02.458 Well, this is probably a good initial mindset to have because it is a 00:01:02.458 --> 00:01:03.868 little bit more conservative, right? 00:01:03.868 --> 00:01:08.128 It's better than expecting to be able to deduct everything and not being able to. 00:01:08.758 --> 00:01:10.528 It's also not always the case. 00:01:11.008 --> 00:01:13.798 So what I want to dive into today. 00:01:14.218 --> 00:01:19.648 Is the handful of ways that you still can use passive losses, even if you 00:01:19.648 --> 00:01:21.868 are not a real estate professional. 00:01:22.348 --> 00:01:26.458 Or even if you're not using the short-term rental loophole. 00:01:26.698 --> 00:01:29.818 So we're going to set those two things aside and today. 00:01:29.818 --> 00:01:32.788 What we're going to talk about is your everyday investor. 00:01:33.088 --> 00:01:38.908 Who owns long-term rentals, they generate passive losses and ways you may or 00:01:38.908 --> 00:01:41.158 may not be able to use those losses. 00:01:41.758 --> 00:01:43.348 So as a starting point. 00:01:44.038 --> 00:01:46.828 Rental income is taxed as passive income. 00:01:47.398 --> 00:01:49.528 What this means is the good side. 00:01:50.038 --> 00:01:52.708 Is that you don't pay any payroll taxes on this. 00:01:53.158 --> 00:01:53.968 You don't pay that. 00:01:53.968 --> 00:01:57.928 FICA, Medicare, social security, all of those extra taxes that 00:01:57.928 --> 00:01:59.938 you pay on your W2 income. 00:02:00.478 --> 00:02:03.928 Or that self-employment tax that you pay on your self employment income. 00:02:04.648 --> 00:02:08.368 None of those additional taxes apply to rental income. 00:02:08.878 --> 00:02:13.018 So as a starting point, like even without looking at the benefits of 00:02:13.498 --> 00:02:17.038 depreciation and potential losses and loan paydown and everything else. 00:02:17.848 --> 00:02:18.928 Even if you are. 00:02:19.438 --> 00:02:22.498 Earning more taxable income on paper from your rentals. 00:02:23.218 --> 00:02:27.418 This is a better quality of income to have then your W2 income. 00:02:27.988 --> 00:02:31.228 The goal is to replace that earned income, which is taxed 00:02:31.228 --> 00:02:32.878 in the highest way possible. 00:02:33.118 --> 00:02:36.598 When you have those extra self-employment taxes or payroll taxes. 00:02:37.048 --> 00:02:39.178 And replace it with this passive income. 00:02:39.658 --> 00:02:42.238 Where you are not paying those additional taxes on it. 00:02:42.628 --> 00:02:44.848 So as a starting point, just keep in mind. 00:02:45.178 --> 00:02:49.648 That if you make an extra $10,000 a year from rentals, versus if you make 00:02:49.648 --> 00:02:52.618 an extra $10,000 a year at your W2 job. 00:02:53.008 --> 00:02:56.848 You will pay less in tax on that passive rental income always. 00:02:57.298 --> 00:03:01.468 So that is the first thing to kind of put into your mind because a lot of people 00:03:01.468 --> 00:03:06.058 are disappointed if they can't use losses that happen, or if they don't have losses. 00:03:06.808 --> 00:03:09.478 Just as a starting point, you're kind of ahead out of the gate. 00:03:10.078 --> 00:03:14.068 The next thing to be mindful of is that while there's that huge benefit 00:03:14.068 --> 00:03:19.468 of not paying those extra taxes, The biggest downside to passive rentals. 00:03:20.218 --> 00:03:23.158 Is that to use any passive losses generated? 00:03:23.458 --> 00:03:25.018 There are some limits. 00:03:25.378 --> 00:03:27.418 So again, I've mentioned this before. 00:03:27.448 --> 00:03:30.328 There's good and bad with almost everything in the tax code. 00:03:30.928 --> 00:03:35.548 When your rental creates passive losses, the first thing to consider. 00:03:36.088 --> 00:03:39.838 Is that passive losses can always offset passive income. 00:03:40.468 --> 00:03:44.878 So if you have two properties that cash flow really well and they make 00:03:44.878 --> 00:03:49.108 income on paper, and then you buy a new property and due to depreciation in those 00:03:49.108 --> 00:03:51.118 early years, it has a loss on paper. 00:03:51.928 --> 00:03:56.518 That passive loss can always offset passive income. 00:03:57.118 --> 00:03:59.038 Before I go farther into the episode. 00:03:59.038 --> 00:04:01.618 I want to note for anyone who is newer and listening. 00:04:02.098 --> 00:04:06.388 When we're talking about your rentals, creating a loss, creating a passive loss. 00:04:06.928 --> 00:04:12.148 I don't want you to lose money, please don't go buy an absolutely trashed 00:04:12.148 --> 00:04:15.028 deal to lose money on for tax benefits. 00:04:15.568 --> 00:04:16.648 That is not the goal. 00:04:16.678 --> 00:04:18.028 We are not doing that. 00:04:18.328 --> 00:04:20.308 I mean, some of us, some people are doing that. 00:04:20.308 --> 00:04:22.198 They, but unintentionally. 00:04:22.858 --> 00:04:23.908 The goal is. 00:04:24.508 --> 00:04:25.918 When you buy a rental. 00:04:26.518 --> 00:04:29.158 You have all of your standard operating expenses, right? 00:04:29.158 --> 00:04:29.878 You pay. 00:04:30.208 --> 00:04:35.848 The loan interest, you pay utilities, you pay for insurance for each of those 00:04:35.848 --> 00:04:38.398 deductions that reduce your rental income. 00:04:39.088 --> 00:04:40.798 You have to write a check, right? 00:04:40.798 --> 00:04:43.678 There's a literal cash outflow to earn that deduction. 00:04:44.278 --> 00:04:48.328 However we get to depreciate rental properties. 00:04:48.358 --> 00:04:50.728 You get to depreciate any business use asset. 00:04:51.328 --> 00:04:55.258 This is the IRS's way of saying something you're using. 00:04:55.258 --> 00:04:56.728 That is a tangible item. 00:04:57.148 --> 00:04:59.098 Should wear out over time. 00:04:59.218 --> 00:04:59.638 Right? 00:05:00.058 --> 00:05:01.978 And you spent a big amount for this item. 00:05:01.978 --> 00:05:04.618 So we're not just going to let you write it off right now because you're 00:05:04.618 --> 00:05:08.248 really going to be using it to create income for the next however many years. 00:05:08.758 --> 00:05:10.618 So to try to better match that up. 00:05:10.978 --> 00:05:14.758 The tax code has certain lives assigned to certain asset types. 00:05:15.328 --> 00:05:19.078 And so your purchase price, the amount you paid for the asset. 00:05:19.948 --> 00:05:21.238 Which on real estate. 00:05:21.808 --> 00:05:24.928 The amount you paid for the asset, you have to back out land. 00:05:24.928 --> 00:05:26.458 We don't get to depreciate land. 00:05:26.458 --> 00:05:27.928 So it's going to be your purchase price. 00:05:28.288 --> 00:05:29.338 Lester land value. 00:05:29.728 --> 00:05:33.658 So that asset, that tangible building asset, you get to depreciate 00:05:33.688 --> 00:05:35.638 across 27 and a half years. 00:05:36.028 --> 00:05:37.048 We're 39 years. 00:05:37.048 --> 00:05:38.218 If it's non-residential. 00:05:38.908 --> 00:05:42.298 So something I want you to think about though. 00:05:42.898 --> 00:05:44.128 Is most real estate. 00:05:44.548 --> 00:05:45.928 Is not bought in cash. 00:05:46.048 --> 00:05:46.918 Some is. 00:05:47.518 --> 00:05:51.028 So you have to spread this deduction out across multiple years, right? 00:05:51.028 --> 00:05:52.228 27 and a half years. 00:05:53.068 --> 00:05:57.778 If you buy a half million dollar property and let's say $400,000 00:05:57.778 --> 00:05:59.458 of that is the building value. 00:06:00.328 --> 00:06:03.388 You likely didn't spend $400,000. 00:06:03.718 --> 00:06:04.888 You only put down. 00:06:05.488 --> 00:06:07.498 20%, 25%. 00:06:07.888 --> 00:06:09.568 Could be as low as 0%. 00:06:09.568 --> 00:06:14.008 If you moved into it as a primary home and you had a VA loan or a two 00:06:14.008 --> 00:06:18.958 other K loan, and then you moved out later and converted it to a rental. 00:06:19.438 --> 00:06:23.368 So the amount of cash you put in doesn't doesn't matter when it comes 00:06:23.368 --> 00:06:25.438 to this, the only thing that matters. 00:06:25.888 --> 00:06:28.858 Is the literal value of that building. 00:06:29.488 --> 00:06:33.148 The value you paid for just the building, whether it is financed 00:06:33.148 --> 00:06:35.578 by debt or cash, you get the same. 00:06:35.608 --> 00:06:37.588 Write off you get the same deduction. 00:06:38.068 --> 00:06:40.108 And this is a huge benefit. 00:06:40.798 --> 00:06:42.898 So let's say you buy a property. 00:06:43.558 --> 00:06:45.598 You finance the majority of it. 00:06:45.898 --> 00:06:50.548 And now you get to depreciate this property across 27 and a half years. 00:06:51.238 --> 00:06:53.038 Again, you paid for it with a loan. 00:06:53.158 --> 00:06:54.988 So you didn't put this cash outflow. 00:06:55.978 --> 00:07:01.528 But now every year, You get to take that $5,000 deduction 00:07:01.558 --> 00:07:03.568 or whatever it is on paper. 00:07:04.378 --> 00:07:07.678 What this means is because you're not writing a check for it each year. 00:07:08.278 --> 00:07:11.878 At the end of the year, you have collected your rents. 00:07:12.208 --> 00:07:15.178 You have written checks for all of your operating expenses. 00:07:15.748 --> 00:07:18.838 So then let's say at the end of the year, after all of that happens in your 00:07:18.838 --> 00:07:21.148 bank account, you still have $10,000. 00:07:21.598 --> 00:07:22.768 Awesome, great. 00:07:22.768 --> 00:07:23.368 First year. 00:07:24.058 --> 00:07:30.178 You go to file your taxes now and you get to take this extra $5,000 right off. 00:07:30.778 --> 00:07:33.748 You get to write something off that you didn't have to 00:07:33.748 --> 00:07:35.758 spend money on during the year. 00:07:36.178 --> 00:07:39.598 So in that circumstance, you would get to reduce your $10,000 00:07:39.598 --> 00:07:41.968 of income down to only $5,000. 00:07:42.688 --> 00:07:44.878 What ends up happening a lot of the time. 00:07:45.448 --> 00:07:49.678 Is the numbers get a little closer, especially in the early years when 00:07:50.068 --> 00:07:51.778 the rental is still stabilizing. 00:07:52.708 --> 00:07:57.808 So, what we see a lot is a rental where at the end of the year, You will have, 00:07:58.078 --> 00:08:01.018 you know, say $4,005,000 in the bank. 00:08:01.048 --> 00:08:05.548 You made a few thousand dollars on this property that is literal cash in hand. 00:08:06.478 --> 00:08:12.238 But for taxes, if you have that $5,000, write-off now that you get to write 00:08:12.238 --> 00:08:16.738 off on your tax return, but you're not actually sending off a check for. 00:08:17.248 --> 00:08:21.448 Um, for any gen Z listening, a check is like a little piece of paper. 00:08:21.898 --> 00:08:25.948 And it is like, uh, paying for something using apple pay. 00:08:26.398 --> 00:08:28.438 But you had to kill a tree first. 00:08:29.278 --> 00:08:33.718 But any type of payment, you didn't make any type of payment to get that right off. 00:08:34.708 --> 00:08:38.128 So what ends up happening is you have an extra few thousand 00:08:38.128 --> 00:08:39.478 dollars cash in your pocket. 00:08:40.378 --> 00:08:42.988 But to the IRS, you lost money. 00:08:43.198 --> 00:08:46.258 You have a loss of a couple thousand dollars, and that 00:08:46.258 --> 00:08:47.428 is what you are taxed on. 00:08:47.788 --> 00:08:53.878 So when we talk about passive losses and having rental losses, That's the goal. 00:08:53.938 --> 00:08:55.138 That's what we're shooting for. 00:08:55.138 --> 00:09:00.298 We're not trying to literally spend more money than we've made because 00:09:00.298 --> 00:09:02.608 spending money to save on taxes. 00:09:03.058 --> 00:09:04.588 It's typically not the move. 00:09:05.338 --> 00:09:06.988 Not early on, especially. 00:09:07.828 --> 00:09:11.668 So, what we're talking about is creating these paper losses, where you're 00:09:11.668 --> 00:09:13.258 putting more cash in your pocket. 00:09:13.588 --> 00:09:16.468 But as far as the IRS is concerned, you're losing money. 00:09:16.768 --> 00:09:17.758 That's the goal. 00:09:18.538 --> 00:09:22.018 So when you have those paper losses, these passive losses, they can 00:09:22.018 --> 00:09:23.578 always offset your passive income. 00:09:24.028 --> 00:09:28.138 So again, if you have one profitable rental, one non that will always net out. 00:09:28.978 --> 00:09:34.138 The next option that I think a lot of people either forget about, or 00:09:34.138 --> 00:09:36.208 they don't think about, I'm not sure. 00:09:36.808 --> 00:09:39.898 But every time I hear someone say you can only use losses. 00:09:39.898 --> 00:09:40.948 If you're a professional. 00:09:41.488 --> 00:09:42.868 That's not the case. 00:09:42.988 --> 00:09:44.878 If you meet this criteria. 00:09:45.478 --> 00:09:48.988 So there is a small taxpayer exclusion in the code. 00:09:49.588 --> 00:09:52.618 Where if your modified adjusted gross income. 00:09:53.398 --> 00:09:55.708 Is under a hundred thousand dollars. 00:09:56.608 --> 00:10:02.428 Every year, you are allowed to deduct up to $25,000 of passive losses 00:10:02.818 --> 00:10:04.918 against all of your other income types. 00:10:05.518 --> 00:10:08.158 So if your W2 job. 00:10:08.518 --> 00:10:10.528 Is right around a hundred thousand dollars. 00:10:10.528 --> 00:10:12.268 You don't really have anything else going on. 00:10:12.748 --> 00:10:16.198 And then you have a few rentals that each lose money on paper. 00:10:16.588 --> 00:10:20.638 You can drop your income down by $25,000. 00:10:21.508 --> 00:10:24.988 The only requirement here is active participation. 00:10:25.318 --> 00:10:29.008 Which is a much lower barrier than material participation. 00:10:29.038 --> 00:10:32.428 These are separate tests and people use these terms interchangeably. 00:10:32.428 --> 00:10:33.538 They're not the same. 00:10:33.958 --> 00:10:36.988 Material participation has seven specific tests. 00:10:37.018 --> 00:10:38.128 They're harder to reach. 00:10:38.548 --> 00:10:41.788 We talk about that more with the short-term loophole or reps. 00:10:42.508 --> 00:10:46.618 Active participation is basically just ordinary involvement, right? 00:10:46.618 --> 00:10:47.908 It's just some level of involvement. 00:10:48.508 --> 00:10:49.018 So. 00:10:49.858 --> 00:10:51.148 You have these rentals? 00:10:51.568 --> 00:10:53.308 You are actively participating. 00:10:53.818 --> 00:10:58.198 And now you can take up to $25,000 a year against your other income. 00:10:58.798 --> 00:11:02.398 If your modified adjusted gross income is under a hundred thousand dollars. 00:11:03.358 --> 00:11:05.878 No I'm saying modified, adjusted, gross income. 00:11:06.418 --> 00:11:10.558 A lot of people are familiar with AGI, your adjusted gross income. 00:11:11.248 --> 00:11:15.508 For this calculation specifically, it's a modified version of that. 00:11:15.688 --> 00:11:16.978 There are some adjustments. 00:11:17.338 --> 00:11:22.618 Really common ones are any I'm like the deductible portion of 00:11:22.648 --> 00:11:24.808 self-employment tax gets added back. 00:11:25.408 --> 00:11:30.028 The deduction for student loan interest or tuition expense gets added back. 00:11:30.448 --> 00:11:33.058 Um, IRA contributions can be added back. 00:11:33.058 --> 00:11:36.628 So it's not just your standard adjusted gross income. 00:11:36.988 --> 00:11:40.498 So make sure you take a look at this and look at the modified, 00:11:40.498 --> 00:11:42.418 adjusted gross income calculation. 00:11:43.018 --> 00:11:46.708 To make sure the amount is actually what you think it's going to be. 00:11:46.978 --> 00:11:51.358 'cause some of these deductions you get for this calculation, they get 00:11:51.718 --> 00:11:53.638 put back into your income first. 00:11:53.938 --> 00:11:56.008 Before seeing if you're at that limit. 00:11:56.608 --> 00:11:57.808 So that's the first point. 00:11:58.078 --> 00:12:00.238 Check your modified, adjusted gross income. 00:12:00.838 --> 00:12:04.978 The second point, like I said, if you're under a hundred thousand, you get to take 00:12:04.978 --> 00:12:08.368 up to $25,000 a year of passive losses. 00:12:08.908 --> 00:12:11.128 And offset any of your other income with it. 00:12:11.728 --> 00:12:15.538 Once your modified adjusted gross income is above a hundred thousand. 00:12:16.198 --> 00:12:21.418 The amount of loss, you can use it phases out by $1 for every 00:12:21.418 --> 00:12:24.118 $2 that you're above that limit. 00:12:24.658 --> 00:12:25.258 So. 00:12:25.918 --> 00:12:30.628 If your modified adjusted gross income is $125,000. 00:12:31.168 --> 00:12:34.438 Then you are over that limit by 25,000. 00:12:34.858 --> 00:12:39.508 So it phases out by $1 for every $2 that you're over. 00:12:39.988 --> 00:12:44.428 So instead of that full $25,000 loss that you can take. 00:12:44.848 --> 00:12:47.098 You're going to get half as much of that. 00:12:47.338 --> 00:12:49.648 And it's going to be 12 five. 00:12:50.248 --> 00:12:53.698 This limit and this $25,000 exclusion. 00:12:54.238 --> 00:12:56.608 So it starts to phase out at a hundred thousand. 00:12:57.238 --> 00:13:00.028 And it completely goes away at 150,000. 00:13:00.628 --> 00:13:05.338 So if your modified adjusted gross income is over $150,000. 00:13:05.878 --> 00:13:09.088 You can no longer take any of those passive losses against 00:13:09.088 --> 00:13:10.348 your other income types. 00:13:11.098 --> 00:13:12.718 But even here. 00:13:13.168 --> 00:13:15.208 I don't want you to think to yourself. 00:13:15.328 --> 00:13:17.248 Oh, I can't use these losses. 00:13:17.308 --> 00:13:18.178 It doesn't matter. 00:13:18.178 --> 00:13:21.598 I shouldn't think about this or I shouldn't try to maximize these. 00:13:22.228 --> 00:13:24.028 Because you don't lose the losses. 00:13:24.628 --> 00:13:25.378 I've seen. 00:13:25.918 --> 00:13:29.818 Tax preparers have kind of a blahzay attitude towards rentals 00:13:29.878 --> 00:13:31.498 and being strategic with them. 00:13:32.068 --> 00:13:32.638 With. 00:13:33.358 --> 00:13:36.358 The sort of mindset of, oh, well, their income's too high. 00:13:36.358 --> 00:13:37.948 They can't use the losses anyway. 00:13:37.948 --> 00:13:41.578 So no, we're not going to ask about if they have, you know, business 00:13:41.608 --> 00:13:44.608 use on their cell phone or no, we're not going to ask about home office, 00:13:44.638 --> 00:13:46.168 even though they have 20 properties. 00:13:46.828 --> 00:13:49.978 They don't check and they don't think there's an intent or a 00:13:50.008 --> 00:13:54.448 purpose to maximizing that passive loss, just because the income is 00:13:54.448 --> 00:13:55.918 too high to use it in that year. 00:13:56.518 --> 00:14:00.628 I think this is a stupid mindset because you will get 00:14:00.628 --> 00:14:02.518 to use that loss at some point. 00:14:02.728 --> 00:14:04.078 It doesn't go away. 00:14:04.678 --> 00:14:06.688 And if your income is too high. 00:14:07.048 --> 00:14:09.568 You're over that $150,000. 00:14:09.838 --> 00:14:12.958 You don't have any other passive income or even after offsetting 00:14:12.958 --> 00:14:14.488 it, there stole a loss left. 00:14:15.148 --> 00:14:19.858 What you're basically now getting to do is fund a piggy bank. 00:14:20.218 --> 00:14:24.628 You're getting to create a piggy bank to help you save tax later. 00:14:25.528 --> 00:14:26.308 Let me explain. 00:14:27.238 --> 00:14:30.118 When you have passive losses, you can't use. 00:14:30.688 --> 00:14:32.188 They don't disappear. 00:14:32.398 --> 00:14:32.818 Right? 00:14:32.848 --> 00:14:36.298 They're not one of those pieces of paper where the invisible ink shows 00:14:36.298 --> 00:14:38.548 up and then disappears a year later. 00:14:39.148 --> 00:14:40.468 They stick around. 00:14:41.068 --> 00:14:44.908 My favorite way to describe carry over passive losses. 00:14:44.938 --> 00:14:49.858 These passive losses you can't use is if you have ever played super Mario. 00:14:50.518 --> 00:14:53.458 If you already have the raccoon tail. 00:14:53.968 --> 00:14:56.788 And you now get a large mushroom. 00:14:57.208 --> 00:14:59.428 You can't use both right. 00:14:59.698 --> 00:15:02.038 You're already the raccoon that's even better. 00:15:02.458 --> 00:15:07.738 However that mushroom just stays in that little box at the top of the screen. 00:15:07.948 --> 00:15:09.238 It just hovers there. 00:15:09.718 --> 00:15:11.758 Waiting for when you can use it. 00:15:12.148 --> 00:15:12.448 All right. 00:15:12.508 --> 00:15:13.978 You keep going in the level. 00:15:14.188 --> 00:15:15.778 You get bit by a Kupa. 00:15:16.078 --> 00:15:17.998 Then the mushroom drops down. 00:15:18.358 --> 00:15:19.588 When you can use it. 00:15:20.158 --> 00:15:23.308 That's the same thing that happens with your passive losses. 00:15:23.818 --> 00:15:27.808 You can't use them when you incur them, but they just hang out in that 00:15:27.808 --> 00:15:31.888 little floating box until you can, and then they're there for you to use. 00:15:32.488 --> 00:15:34.858 So when can you use them? 00:15:34.978 --> 00:15:35.308 Right. 00:15:35.338 --> 00:15:36.478 I'm carrying over these losses. 00:15:36.478 --> 00:15:38.338 What's the point of the piggy bank, Natalie? 00:15:38.488 --> 00:15:39.688 Why do I care? 00:15:40.588 --> 00:15:42.538 You can use them in any year. 00:15:42.538 --> 00:15:44.488 Your income drops below a hundred thousand. 00:15:45.028 --> 00:15:45.328 Right. 00:15:45.328 --> 00:15:47.398 Maybe you have a year you're planning to travel. 00:15:47.398 --> 00:15:49.318 Maybe you are switching jobs. 00:15:49.528 --> 00:15:52.408 Any number of things can happen in your modified income 00:15:52.408 --> 00:15:53.818 drops below that threshold. 00:15:54.088 --> 00:15:57.148 You get to start taking out some money from that piggy bank. 00:15:57.148 --> 00:15:59.218 You get to start using some of those losses. 00:15:59.818 --> 00:16:02.518 One of my favorite planning points for those losses. 00:16:03.088 --> 00:16:04.498 Is when you sell. 00:16:05.308 --> 00:16:07.558 When you sell a rental property. 00:16:07.948 --> 00:16:11.788 The gain from that rental is in that same bucket. 00:16:12.148 --> 00:16:14.158 Of passive income, passive losses. 00:16:14.938 --> 00:16:18.508 So, if you have been accumulating these passive losses for years 00:16:18.508 --> 00:16:22.018 and years, your income was too high, you couldn't deduct them. 00:16:22.078 --> 00:16:22.498 Right. 00:16:23.098 --> 00:16:25.258 But you've been filling up your piggy bank. 00:16:25.918 --> 00:16:27.478 It's seven years in. 00:16:27.598 --> 00:16:31.108 Most investors tend to hold properties for around seven years. 00:16:31.618 --> 00:16:33.268 And maybe it's less time than that. 00:16:33.268 --> 00:16:36.718 But every few years, what I've seen with most clients is there's at 00:16:36.718 --> 00:16:38.548 least one property they want to sell. 00:16:38.548 --> 00:16:43.078 For some reason there's just enough equity in it that the sell point 00:16:43.078 --> 00:16:45.928 versus rental break even point shifts. 00:16:46.378 --> 00:16:51.298 Maybe it's in a neighborhood where they have constantly had to evict people. 00:16:51.298 --> 00:16:52.408 There's crime there's stuff. 00:16:52.438 --> 00:16:54.358 They don't want to deal with whatever the case is. 00:16:55.078 --> 00:16:59.368 Every so many years, there's a good chance you will want to sell a property. 00:16:59.968 --> 00:17:04.588 And it's going to create a gain that is in that same passive bucket. 00:17:05.188 --> 00:17:09.508 If in that bucket, you also have a whole pile of losses. 00:17:10.288 --> 00:17:12.808 They're going to get to offset that gain. 00:17:13.408 --> 00:17:18.268 So if you have a hundred thousand dollars of accumulated. 00:17:18.928 --> 00:17:21.958 Carry over passive losses from all of these earlier years 00:17:21.958 --> 00:17:23.158 when you couldn't deduct them. 00:17:23.668 --> 00:17:28.948 And you sell a rental property this year and it has a hundred thousand dollar gain. 00:17:29.398 --> 00:17:31.678 Those are going to get to net together. 00:17:32.578 --> 00:17:36.508 So it's a little bit shortsighted to look at rentals and think 00:17:36.598 --> 00:17:37.978 I can't use the losses. 00:17:38.068 --> 00:17:40.918 I'm not going to bother trying to maximize these. 00:17:41.908 --> 00:17:45.958 You will get to use them at some point in almost every search circumstance. 00:17:46.438 --> 00:17:51.238 So it is always worth it to write down, to deduct, to account for 00:17:51.328 --> 00:17:54.568 all expenses that you qualify for. 00:17:54.838 --> 00:17:56.698 Even if it doesn't help you this very year. 00:17:57.298 --> 00:18:00.718 So I hate this idea that you don't get to use your losses, that unless you're a real 00:18:00.718 --> 00:18:02.218 estate professional, it doesn't benefit. 00:18:02.218 --> 00:18:02.518 You. 00:18:02.908 --> 00:18:05.848 There's a lot of benefits and there's a lot of tax planning 00:18:05.848 --> 00:18:06.958 that can come into play. 00:18:07.438 --> 00:18:11.158 You want to make sure to be strategic and maximize those losses? 00:18:11.758 --> 00:18:13.258 Now the last thing. 00:18:13.648 --> 00:18:14.908 That I'll kind of mention. 00:18:15.508 --> 00:18:19.498 Is people will typically say, and as a starting point, this is true. 00:18:20.368 --> 00:18:23.458 That even though you can offset your losses. 00:18:24.238 --> 00:18:29.158 You will often still have to recapture your depreciation when you sell right. 00:18:29.638 --> 00:18:35.308 If you convert a primary to a rental, but only for a few years, and you can still 00:18:35.308 --> 00:18:41.428 use a primary sale exclusion, you still have to pay and recapture or payback. 00:18:41.458 --> 00:18:42.868 The depreciation you took. 00:18:43.588 --> 00:18:47.668 Even if your gain is excluded, depreciation kind of falls into 00:18:47.668 --> 00:18:49.048 a separate little mini bucket. 00:18:49.528 --> 00:18:50.908 We'll go into that more later. 00:18:51.868 --> 00:18:52.378 But. 00:18:52.978 --> 00:18:54.118 When you sell. 00:18:54.718 --> 00:18:57.538 People will typically say you recaptured appreciation. 00:18:57.568 --> 00:18:59.308 You always have depreciation recapture. 00:18:59.908 --> 00:19:03.028 If you just appreciated your rental on straight line. 00:19:03.418 --> 00:19:05.098 Like you didn't do a cost segregation. 00:19:05.098 --> 00:19:07.918 You just wrote it off across that 27 and a half years. 00:19:08.518 --> 00:19:13.708 What you actually have is unrecaptured 1250 tax. 00:19:14.308 --> 00:19:18.028 This is a whole other episode I'll go into, but just as a starting point. 00:19:18.028 --> 00:19:20.908 So if you're trying to look into this more, you're interested in this. 00:19:20.938 --> 00:19:21.928 You want to research it. 00:19:22.918 --> 00:19:24.538 Unrecaptured 1250. 00:19:25.288 --> 00:19:30.238 It is any depreciation on a residential or a non-commercial building? 00:19:30.958 --> 00:19:33.418 That was not an excess of straight line. 00:19:34.288 --> 00:19:38.638 Only depreciation in excess of straight line is technically a recapture tax. 00:19:38.698 --> 00:19:40.528 If it doesn't meet that definition. 00:19:41.008 --> 00:19:42.688 Which almost no. 00:19:43.078 --> 00:19:45.718 1250, which is depreciation on any building. 00:19:46.708 --> 00:19:48.658 Almost never does that apply anymore? 00:19:48.688 --> 00:19:51.898 The code provision that allowed that phased out years and years ago, 00:19:52.228 --> 00:19:55.108 we very rarely see 1250 recapture. 00:19:55.138 --> 00:19:58.468 It is technically an unrecaptured 1250 gain. 00:19:59.158 --> 00:20:03.058 Is what people use the term quote, like depreciation recapture. 00:20:03.598 --> 00:20:05.098 They use a kind of interchangeably. 00:20:05.638 --> 00:20:08.218 But using the correct technical term, we'll help you. 00:20:08.908 --> 00:20:12.928 Find better guidance when you're trying to figure out strategy and planning. 00:20:12.988 --> 00:20:13.348 Right? 00:20:13.528 --> 00:20:15.808 So unrecaptured 1250 gain. 00:20:16.408 --> 00:20:18.838 And as a starting point, it is true. 00:20:19.318 --> 00:20:22.678 That you almost always need to pay that back when you sell. 00:20:23.278 --> 00:20:24.328 The reason being. 00:20:25.018 --> 00:20:27.538 Is you got that original write-off right? 00:20:27.538 --> 00:20:31.108 Because like I said, the IRS, the tax code, they're looking at it as well. 00:20:31.678 --> 00:20:34.528 You bought a business asset, you should use it for multiple years. 00:20:34.528 --> 00:20:37.228 It will make you money for multiple years, but stuff wears out. 00:20:37.498 --> 00:20:37.798 Right? 00:20:37.798 --> 00:20:42.178 So after all these years, We're basically accounting for the wear and tear on this. 00:20:42.628 --> 00:20:44.188 And writing off the expense. 00:20:44.728 --> 00:20:47.038 In a way that matches up with the years, it'll earn you income 00:20:47.038 --> 00:20:50.158 for, and at the end of that, it shouldn't really be worth anything. 00:20:50.788 --> 00:20:52.648 That's true with a lot of assets, right? 00:20:52.648 --> 00:20:56.098 Your computer in five years, probably not going to be worth anything. 00:20:56.128 --> 00:20:58.288 Your car, probably not worth anything. 00:20:59.038 --> 00:21:01.318 This isn't often the case with real estate, right. 00:21:01.318 --> 00:21:02.518 Real estate tends to go up. 00:21:03.478 --> 00:21:06.718 So then the IRS says, well, wait, hold, hold the phone. 00:21:06.718 --> 00:21:07.768 Hold on a second. 00:21:08.428 --> 00:21:11.968 I let you write that off because this should be wearing out. 00:21:11.998 --> 00:21:16.318 This is supposed to be worth less in 27 years, but you 00:21:16.318 --> 00:21:17.698 sold it and made more money. 00:21:18.388 --> 00:21:20.998 I want you to give me that wear and tear money back. 00:21:21.508 --> 00:21:25.408 Because it didn't wear and tear like it didn't drop in value. 00:21:25.708 --> 00:21:28.618 So they basically want you to give them back the right off. 00:21:28.618 --> 00:21:32.488 They gave you under the assumption of something wearing out over time. 00:21:33.208 --> 00:21:37.498 So when you go to sell a rental that was depreciated on straight line. 00:21:38.098 --> 00:21:40.858 You have an unrecaptured 1250 gain. 00:21:41.248 --> 00:21:44.458 That is the depreciation recapture people refer to. 00:21:45.208 --> 00:21:47.698 You do almost always need to pay that back. 00:21:48.358 --> 00:21:49.048 However. 00:21:49.828 --> 00:21:52.348 There are a couple things you can do. 00:21:53.038 --> 00:21:55.408 To directly reduce that gain. 00:21:56.188 --> 00:21:59.338 And this is something I don't think is spoken about enough. 00:22:00.028 --> 00:22:02.158 And if you want to know. 00:22:02.938 --> 00:22:04.888 The way that you can sell a rental. 00:22:05.518 --> 00:22:10.858 And not have to pay back the depreciation that you took and 00:22:10.858 --> 00:22:12.778 reduce your amount of that. 00:22:12.838 --> 00:22:14.728 Unrecaptured 1250 gain. 00:22:15.238 --> 00:22:18.838 Then you're going to want to come back and make sure you subscribe 00:22:19.228 --> 00:22:21.148 because one of my next episodes. 00:22:21.508 --> 00:22:24.718 Is going to cover how you can sell your rental property. 00:22:25.138 --> 00:22:30.928 And what you can do to directly reduce and even eliminate that. 00:22:31.408 --> 00:22:36.388 1250 unrecaptured gain that quote, depreciation, recapture people talk about. 00:22:36.988 --> 00:22:42.418 So as always, I hope you guys got some good value from today's episode. 00:22:42.898 --> 00:22:43.798 In summary. 00:22:44.488 --> 00:22:47.308 Don't get talked out of maximizing those rental losses. 00:22:47.308 --> 00:22:48.958 Don't be told you can't use them. 00:22:49.618 --> 00:22:51.418 Even if you can't use them today. 00:22:52.018 --> 00:22:55.018 You will likely be able to use them at some point and they can 00:22:55.018 --> 00:22:57.418 be a tremendous benefit to you. 00:22:58.168 --> 00:23:01.018 So I hope this was an insightful episode. 00:23:01.018 --> 00:23:03.418 I hope you guys subscribe and come back. 00:23:03.838 --> 00:23:06.538 Because you are not going to want to miss that episode. 00:23:07.048 --> 00:23:11.758 Talking about how to reduce and potentially eliminate that 00:23:11.758 --> 00:23:13.528 unrecaptured depreciation. 00:23:14.068 --> 00:23:17.818 So I am so appreciative that you guys have stuck it out with me. 00:23:18.118 --> 00:23:19.648 Listen to the end of this episode. 00:23:20.038 --> 00:23:25.098 So subscribe share, like, and I will talk to you guys next week.