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How to Deduct 100% of Real Estate Losses Against Ordinary Income!

market research Jan 13, 2020

Surprisingly, this one simple adjustment can become one of the most powerful tax strategies whether you're an entrepreneur, investor, or even a corporate w-2 employee.

When filing for your tax return, there are three "boxes" you can check depending on what type of investor you classify as.

(While we do have experience in this realm through our fourplex investments, we recommend discussing all of the following later with your tax consultant. With their help you could potentially save big time!)

Here's a snapshot of each strategy...

3 Categories the IRS Uses to Classify RE Investors:

(and their different pros and cons — via. Mark Kohler)

Classification #1 — The "Passive Investor"

The least beneficial category and only allows a taxpayer the ability to deduct passive losses against passive gains.

Classification #2 — The "Active Investor"

This designation allows a taxpayer to deduct an additional $25,000 of losses against ordinary income, however, this deduction phases out completely at the Adjusted Gross Income (AGI) level of $150,000 for a married couple filing jointly and $100,000 for a single individual. Anyone can qualify and to do so must simply be involved in the decision making for the real estate investment, and doesn’t even require the taxpayer to make a special election on their tax return.

Classification #3 — The "Real Estate Professional"

This is where things get good (assuming this is applicable to your circumstances.) The RE Professional designation allows taxpayers to deduct 100% of all real estate losses against ordinary income IF they qualify and IF they WANT to qualify."

How to qualify as a Real Estate Professional?

There are three requirements:

  1. Taxpayer must spend the majority of their time in real property businesses.
  2. Taxpayer must spend at least 750 hours a year in the real estate industry or 'real property business'.
  3. Taxpayer must materially participate in the management of the properties or through participation in (a quite easy to qualify for) 7 step test.

"Again, as a cautionary note, it is important to realize that qualifying as a Real Estate Professional is not a ‘fit’ for every taxpayer.  As a Professional, generally, all of your business income will be considered ordinary income subject to self-employment tax.  Thus, an S-corporation is almost a must for every Real Estate Professional.

If you are considering ‘checking the box’ on your tax return that you qualify as a Real Estate Professional, make sure to ‘run the numbers’ and see what the actual tax impact may be on your tax return." - Mark Kohler

Rolling out more multifamily in 2020! 

Now that the new year is in full swing, we're ready to get back to investing in fourplexes! If you've been watching from afar but are still curious as to how FIG got started and how we do what we do, check out a quick video we pieced together for The Real Estate Guys Podcast as a summary of the history of FIG and our process.

Available Fourplexes

If you'd like to meet in person and are in either Houston, TX, Orange County, CA, San Jose, CA, Boise, ID, or Utah, we'll be in town soon! Find meetups/Q&A's here: Event Schedule

Feel free to browse our site or contact us at fig.us/consult.

Happy investing!

FIG's Waitlist:

Each year, the Fourplex Investment Group releases new multifamily projects in a variety of markets. Joining FIG's investor waitlist is the easiest way to grow your portfolio before reservations fill up...

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Join FIG's Waitlist


Each year, the Fourplex Investment Group releases new multifamily projects in a variety of markets. FIG's waitlist is the easiest way to grow your portfolio before reservations fill up.