Real Estate Investing Tax Advice with Brandyn Cox

Mar 20, 2020

I wanted to take some time to emphasize some very important aspects of investing in real estate. Some may already know this, some may be confused by this and others may not even know about the topics I’ll discuss.

1) Exclude sale of home
2) Unrecaptured §1250 Gains
3) Active participation for passive losses
4) Understanding Depreciation versus tax losses
5) Real estate pro

1) You may be able to exclude the sale of your primary residence IF you meet the following criteria:
a) You reside in the property for AT LEAST two of the most recent 5 years.

b) You own the property during your residency.

IF you are on qualified official extended duty (deployment, PCS, TDY, etc) the period can be extended up to 15 years.
NOTES— You must be on qualified official extended duty for the suspension to matter. For example, if you ETS, you’re no longer on qualified official extended duty. You can exclude UP TO $250,000 ($500,000 if you’re married filing jointly). This ONLY applies to Long Term Capital Gains (which equals selling price minus selling expenses minus the purchase price). Also, this exclusion will not apply toward §1250 Unrecaptured Gains.

2) When you sell or dispose of a property (other than a qualified §1031 exchange) you must recapture the GREATER OF:

a) Depreciation Taken

b) Depreciation allowable

If you forgot to or didn’t take depreciation in the most recent three years, you can amend those returns for a claim of refund and input depreciation. So, what is §1250 property? It’s real estate. When you buy property, you get two pieces: i) Land and ii) Building. The land is pure §1231 property and the building portion is §1250. Land doesn’t depreciate, but the building does. When the property is sold, you have to add the §1250 depreciation back into gross income. Below is an example:

EXAMPLE: Assume you purchase a property for $200,000 and the allocation to land is $50,000. That means the §1250 property has a depreciable basis of $150,000. If the property is placed into service 1 Jan 2014 and you sell it 1 Sep 2020, you’ll have about $33,000 in depreciation deductions allowable or taken. Assume you sell the property for $225,000 with $10,000 in selling expenses:
$225,000 SALES PRICE
=$ 48,000 TOTAL GAIN
- $ 33,000 UNRECAPTURED §1250 GAIN

Conventional math would tell you that you only made $15,000, but you’d be prudent to forget the extra $33,000.

3) IF you actively participate in rental real estate ventures, you may be able to deduct UP TO $25,000 in losses against other income. However, this only applies under the following circumstances:

a) Filing status is NOT married filing separately

b) Your modified income is less than $150,000

However, if your modified income is between $100,000 and $150,000, then you may only deduct up to 1/2 of the difference. For example, an income of $130,000 only has $20,000 left until you hit $150,000, so you can only deduct up to a maximum of $10,000 against other income.
If you exceed $25,000 or allowable limits, those losses carry over until either:

a) You go under the income thresholds.

b) You have passive gains.

c) You’re a real estate professional.

d) You sell the property.

4) This one is simple--depreciation is only one of the line items in deterring loss. Nothing in the tax code disallows you from taking depreciation unless you’re a real estate professional.

5) If you’re active duty, you don’t qualify as a real estate professional, but your spouse may qualify and you can reap the benefits. Real estate professionals don’t have the same limitations as active participation. This topic is a hotly contested item and the IRS loves to litigate this option. If you think you may not qualify, don’t try. If you work with a qualified tax professional and they think you’ll make it, go for it.


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