Passive Loss Limitations Strategies
What strategies are there for circumventing the passive loss limitation rules? My husband and I are incurring an annual negative cash flow of approx $24k on an investement property and our AGI exceeds the maximum level to be eligible to benefit from the tax deductions.
Sell the property generating the loss. Why sit on a property with negative cash flows in a rising interest rate environment?
Alternately, consider setting up several LLCs, two in NV that own LLCs/partnerships in other states, etc. Transfer the property to a CA LLC or partnership which is owned by the NV LLCs. Also, move other income producing oportunities into your LLC structure as they can fully deduct the losses (if you choose the right tax classification for the LLCs, such as having the NV LLC be taxed as a corporation and all the LLCs it owns treated as partnerships.
Why two NV LLCs? To ensure treatment under law as a partnership for the LLCs in other states. Ensure that each NV LLC is owned by at least two people/entities, more would be better. Also, incorporate asset protection strategies into the operating agreements of all LLCs. This strategy will help with asset protection, ensure all business related deductions can be taken, and (assuming profits instead of losses for your endeavors) give you a protected place (the two NV LLCs) in which to accumulate funds for future investment. This is a general strategy, seek professional (CPA and Attorney) advice specific to your situation before implementing. Advantages are: company income is not your income - seperate from you even though you own the companies, lower tax rates on first 50k earned and next 25k, no social security tax (unless you pay yourself a salary), the company can start a 401k or similar retirement plan and contribute 10s of thousands of dollars to it, health/medical, etc. can be paid for through the company, and since real estate is capital intensive you should not be forced to distribute any profits as there is always a "bigger" property to purchase which justifies keeping profits in the NV LLCs taxed as corporations.
Check with a tax pro and consider selling. There are many pitfalls to treating an LLC as a Corp, not the least of which is that when you want to cash out you pay two levels of tax (once at the corp and then at the individual level in the form of a dividend).
You might consider a 1031 tax deferred exchange. This will defer the capital gains and pass the reduced basis from depreciation to an acquired property.
There is a great amount of material on the internet about 1031 exchanges.
And if you do a 1031 into a property that you own for 5 years and live in for two, you can shield up to $250,000 (or 500,000 if married) of capital gains. Not a bad way to get your dream home and save a bundle on taxes.
Quote:Anyone know a percentage I could safely calculate from my equity to cover these equity killers??
gfox,
The depreciation that you took (or should have taken) over the past six years will be recaptured at 25%. The maximum capital gains tax rate that would apply to the rest of your sale profit (due to appreciation) is 15%. If your total taxable income, including your capital gain, keeps you in the 15% tax bracket, then your capital gains tax rate will be only 5%.
Whether to sell or not should be a business decision. Is the property appreciating, or not? Is the cash flow positive or negative? Are rentals in your area in a renters market (soft) or a landlords market (strong)? Is there community development on the horizon that would affect your property value?
If you have compelling reasons to sell, then a 1031 exchange into other investment property will defer your capital gains taxes, perhaps indefinitely.
You can not 1031 into a primary residence. Now you can 1031 with the intention of renting it, but then have a change of plans and make it your primary residence. To be safe, you should rent it for 1 year before moving in.
Quote:The first property, my current primary residence, is a condo, which is part of a two family I converted last year. I sold the condo to myself for $290K. Please tell us how much you originally paid for the two family. How did you determine the price you "paid" for the unit you kept? What did you do with the other half of the two family?