It's time to acknowledge that a return to 3% mortgage rates may be unrealistic. If homeowners are forced to sell, we will likely see a drop in home prices, leading to lower property valuations. I know I'm not the only one who shares this outlook.
If you're in the market, now is the time to buy. Home prices are unlikely to decrease further, and if interest rates do decline in the future, refinancing is always an option.
In my opinion, home prices need to decrease by at least 40% before the market finds balance. For those unsure about buying property right now, seeking advice from an experienced financial advisor for optimal portfolio allocation is crucial. This approach has worked for me-I’ve managed to stay profitable over the past five years, accumulating nearly $1 million in investment returns.
@@FrankJaaay That's impressive! I'd be happy to share more details. I understand the hesitation, especially when it feels like many firms offer similar services. However, finding a trustworthy advisor has been key to my success.
Rebecca Lynne Buie has consistently been my top recommendation. She’s widely recognized for her expertise in financial markets and has a strong track record. I highly recommend her.
I’ve done research over the past year so I already knew this but the way you explained it made it so much easier and would have saved me countless hours if I saw this first. Keep crushing it brother!
I appreciate the existence of tax breaks but navigating loopholes feels dangerous. How can I ensure I'm taking advantage of tax-advantaged investment structures without potentially encountering unintended consequences?
Loopholes can be tricky, but there are plenty of proven tax-advantaged structures. IRAs and employer-sponsored retirement accounts are great options. You can also explore tax-efficient investment vehicles like municipal bonds or index funds. These offer benefits like tax-deferred growth or tax-exempt interest. Talk to your financial planner about these options.
Yeah, planners could make a lot of difference, particularly in a market such as this. Bonds are pretty unstable at the moment, but if you do the right math, you should be just fine. Bloomberg and other finance media have been recording cases of folks gaining over 250k just in a matter of weeks/couple months, so I think there are a lot of wealth transfer in this downtime if you know where to look. I have been using an FA since 2020, and I return at least $30k ROI, and this does not include capital gain.
I work with Sonya Lee Mitchell as my fiduciary advisor. Simply look up the name. You would discover the information you needed to schedule an appointment.
I spent 10 years in the consulting practice of a large accounting firm. I am not saying this video is wrong, but one BIG thing this video does not mention is that the depreciation taken lowers your basis in the asset. When you sell the asset you now have a higher gain and pay more taxes. There is something called 1250 recapture which taxes that portion of the sale at higher rates than normal capital gains. You CAN benefit from the rate arbitrage between ordinary losses and 1250 gains, but because depreciation was taken more gain will be recognized later and at a higher rate.
@@samuelhartzog7209 and then you might avoid taxes, but spend a mountain of money on an army of attorneys and title companies to draft and perform all of this. And 1031 doesn’t eliminate anything, just kicks the can a little farther down the road.
The “excess business loss” rules in IRC 461(l) were amended by the CARES Act in 2020. These rules prevent you from using business losses from pass through entities (partnerships, s-corps, LLC’s, sole proprietors. Etc.) to offset W-2 income. It does not matter how active you are. If you exceed the income threshold you cannot offset W-2 income with business losses.
@@zakshuman8450 IRC 461(l)(6) says that the excess business loss rules shall be applied after the limitations of IRC 469. IRC 469 is where the passive loss rules are codified and includes the “real estate professional rules”. The excess business loss rules are generally agnostic to the income type. The only exclusion to the excess business loss rules I know of is certain farming income/losses for certain years. For a single taxpayer the most business losses you can uses in a year is $250k (plus a little for inflation). So if you have a 500k W-2 and a real estate or other business loss of 500k, you would still owe tax on 250k. This is the w-2 income minus the maximum business loss (250k for single for 500k for married filing jointly). Any excess loss is carried forward as a net operating loss which has other limitations in subsequent years.
@@paulmorrow8372 but this only applies to those owing over $250k on W2 taxes correct? If so everyone under that threshold should still be able to do what the guy in the video is explaining.
WELL ACTUALLY ERASING 250K OF YOUR W2 INCOME NOT 250K OF TAXES, ALL DUE TO THE BUSINESS LOSSES GAME. BUT WHAT THIS GUY IN THE COMMENTS IS SAYING REALLY HAS NO REAL RELEVANCE WITH 99% OF THE POPULATION. THIS 250K LIMIT I’VE NEVER EVEN HEARD OF IN MY 7YRS OF DOING THIS, SO I HAVE TO LOOK INTO THAT TO SEE IF ITS BOGUS OR NOT. NOW EVEN IF IT WERE TO BE TRUE THAT YOU COULD ONLY WRITE-OFF $250K OF W2 INCOME FROM BUSINESS LOSES, THAT’S NOT INCLUDING THE OTHER WRITE-OFF’S THAT’S NON BUSINESS RELATED. YOU CAN VERY WELL WRITE-OFF ANOTHER $100K IN NON-BUSINESS REALTED WRITE-OFF.’S AGAINST YOUR W2 INCOME. AND WIPE OUT $350K OF W2 INCOME. THEN YOU COULD START AGAIN WITH YET A 2ND SEPERATE BUSINESS WITH WRITE-OFF’S. AND ON AND ON AND ON…. THE THING IS YOUR ALSO NOT PAYING ANY TAXES ON THE BUSINESS INCOME IN ADDITION TO THE W2 INCOME. AND EVEN IF YOU DO WIND UP PAYING ANY TAXES ON THE W2 INCOME, THE OVERALL TAX SAVINGS WOULD BE ASTRONOMICAL IN COMPARISON TO THE NONSENSE TAX THAT YOU’D PAY.
I am only 17 and turn 18 in a few weeks. Have learned so much from you and can't wait to start using all the information you have taught me. In the future I plan on being one of your clients.
Buy a duplex, triplex, etc as your first home. House hack. Live in one side and rent out others. This will allow you to save money for another property. Rinse repeat. Wish I did it long time ago.
@@KayakDIY bad advice. Duplex comes with a lot of headache with maintenance and tenants especially if they don’t like each others. Single homes in good neighborhoods is the best. Don’t ever invest in the hood. You can also buy distressed homes and fix them ( but if you don’t know what you are doing contractors might still money from you). I now buy ready to use and do minor works.
There's limitations to all of this tho. Your tenants have to be less than 7 days on average (essentially must be airbnb or the like). I'd also assume that you can only depreciate an item in your home once. Meaning if you depreciate over a short number of years, after those years have passed, you can no longer claim a loss every year. How many airbnb rental properties truly have 200k per year of itemized depreciation as in the example? This video is a good concept but only applies to a small subset of people and most likely does not generate as large of a tax write off as the example implies
It's not bad advice but the original comment is correct.. this will work in year 1. Once you've done the cost seg you need a new property to do it again. Also, the STR is work. And much riskier than owning a straight up rental which would be considered passive.
I have a very experienced CPA, have for years. I showed her this video. And she smiled. The only question that came out of her mouth was, a $200,000 loss? When would that happen? you’re certainly not going to consecutively have a loss on a house of $200,000 every year. So is the game to stay under that seven days occupancy and make the house a failure?. I don’t think you define clear enough if the rental property should be successful, or it should be a complete failure for the tax write off. Because if you’re running a normal even mediocre short-term rental you’re not going to have a $200,000 loss. So is the goal to buy a property not to make money and only to use for a tax write off? I think it’s important you tell people this isn’t a situation for everyone. I know you have another videos but in this video and others I would make sure people understand that you just don’t go out and buy a property and automatically get a right off. It isn’t that easy. You have to work at that house to be a failure if that is what you’re trying to accomplish. And then the question becomes what am I really saving if the house is a failure? like the concept understand the legality‘s and the tax, but I’m completely missing the real world example here.
Karlton is introducing the concept while promoting his business. My take-away is that loss from short term rental is not passive loss and that can offset our W-2 income. $200K loss from STR is ... misleading, even if cost seg. is applied. Thanks for sharing your thoughts. Karlton did a good job overall.
I have never wanted to yell at a UA-camr this much while watching. He is nothing but a snake oil salesman. As if our goal is to lose money. We are not investing to lose money, we are investing to make money. Also, I can’t believe he said W-2 employees work 8 thousand hours per year.
such a legend. man the tax code was invented for us to utilize not fear. thank you for doing your research and delivering to us. the value you bring with every video is enormous. Thank you Karlton
I’ve listened to a lot of financial advice on UA-cam. This is the best. No BS, no repackaging obvious facts as insightful. This is just great stuff and 100% useful and not obvious.
You are the ONLY one who makes this look like fun. In the middle of filing taxes right now and I feel like I got some really valuable information from this video. Thank you so much. ☀️
Karlton I’m a cost segregation study provider and this is the best video I’ve seen that accurately defines cost seg while also showing the tax benefits to be found in real estate.
@@ericboco3029 This type of LLC is a disregarded entity when it comes to taxes, so it doesn't make any difference in terms of tax strategies. So the decision about whether to hold your properties in an LLC would be based on whether you might get at least some partial liability protection from having it in an LLC. (I'm a tax professional, but not a lawyer.)
Even if you have a short term rental, you have to prove material participation, otherwise, it would still be considered a passive activity. The rules for material participation that you mentioned were for qualifying as a real estate professional. Listed below are the test for material participation. You would need to satisfy 1 of the 7. 1) The individual participates in the activity for more than 500 hours during the year. 2) The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year. 3) The individual participates in the activity for more than 100 hours during the taxable year, and such an individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year. 4) The activity is a significant participation activity for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours. 5) The individual materially participated in the activity for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year 6) The activity is a personal service activity, and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year. 7) Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during such a year. Please don't take advice from the internet and consult your tax advisor.
....and, as a REP, when you sell the asset, it's taxed at the much higher rate of taxes, ordinary income tax, rather than the passive capital gains tax. Something everyone needs to line up with their own financial situation and weigh the benefits vs. long term tax ramifications.
@@idahohousehunter from what I understand the IRS stills calculates the allowed depreciation per year whether you took it or not. Deciding to opt out of writing off depreciation doesn't get you out of the ordinary income taxes you will have to pay when you sell.
@@dracox3108 Yes, but using strategies like cost segregation and bonus depreciation will increase the amount of depreciation that you are "allowed to take" essentially. Using these strategies does dramatically increase the amount of recapture that you have to pay back when you sell the property. Basically, there is no escaping the reality that any depreciation you take, you do have to repay as recapture (except for a couple exceptions such as a 1031 exchange, or holding onto it until your death and passing it on to an heir).
I am trying to do this now, it is amazing how many CPA's do not know about this and are fixated on your method without the loophole or know nothing about it. I am actually teaching CPA's when I talk to them and I am nothing close to a CPA or tax professional. I just watched KD. Wish your firm KD was more affordable for those just starting off though. Would love to use this guys firm but they want at least $10k.
protip: you glossed over it, but AGI is a beautiful concept too. It doesn't matter how much you made, if you can create enough deduction to get under the $150K AGI, then those additional deductions start applying to you too. The government sent me stimulus checks because my AGI was below $75,000 or something (didn't ask, didn't have a way to deny, definitely had a use for the money). But just like this video picks apart the definition of "materially participate" there is room to pick about what AGI is.
@@bato-wm5gl Yes. If you make under $100k, you can deduct up to $25,000 of rental losses per year (including losses that came from cost seg). The amount you can deduct phases out if your income is between $100k-$150k (so for example, at $125k of income you can deduct $12,5000/year). I do think that so many of these videos don't mention that because their income is above the limits for that exception, but it's a great deduction for a lot of people. I'm a tax advisor specializing in taxes for real estate investors (located in Austin TX).
You are correct in stating short term rentals aren’t classified as rentals by the IRS, however, they are still a business and the owner needs to show material participation to leverage losses. Please read the Passive Activity Loss (ATG) again. This is clearly stated in chapter 2 page 3.
Remember, Depreciation, is not a permanent deduction. You'll have to pay the piper one day when you sell, unless you 1031 it, then you'll have it there when you sell. The only way to make depreciation never payable, is when you die and your heirs get it and under the current guilde lines they inherit it tax free through the STEP UP program.
@@WoodUCreate that’s fine. If you don’t sell it and pass it on it’s a step up in basis as you mentioned the goal should rarely be to sell rentals if they cash flow and are in good areas anyway if you are a buy and hold investor.
James, completely agree. I find most of the people on here with an opinion say what they think “in theory”, without ever having done it. A 1031 is complicated, and I can tell you most people do not sell using a 1031.
Exact video/training I was looking for, for a long time. I learned more in this one video than all the videos I watched in the last 6 months. Thank You
My mouth is on the floor. I just rented my unit as a long-term rental, and now I regret it. I thought I'd meet the requirement because I am self-managing (I live next door). I'm happy I found you, I'm crying that I didn't find you earlier.
your a Patriot bro...glad to have a soldier like you . you live not only to had value to your life , but demonstrate the true servitude.... adding value to life of your fellow neighbors... PATRIOT!!
in order to have -200k loss from income - exp - depreciation, you need $5.5mill property value, with 0 cash flow monthly. $5.5m/27.5 = 200k. Note $5.5m can't include land since land does not depreciate
This is really good! I need to go back and look at mine again because i actively manage my property but they said i still made too much money to deduct my passive losses from my income.
I am very much "getting" this and am super stoked that I stumbled on your mistakes with LLC's video with impeccable timing. Thanks for making this all available!❤
What was not discussed or mentioned is if an individual has say 4 rental (long term) properties and 1 airbnb (short term) does that 1 short term now include the long term passive income offsets against non-passive income? That wasn't mentioned.
Some economists have projected that both the U.S. and parts of Europe could slip into a recession for a portion of 2023. A global recession, defined as a contraction in annual global per capita income, is more rare because China and emerging markets often grow faster than more developed economies. Essentially the world economy is considered to be in recession if economic growth falls behind population growth.
It's a delicate season now, so you can do little or nothing on your own. Hence I’ll suggest you get yourself a financial expert that can provide you with valuable financial information and assistance
Very true! I've been able to scale from $50K to $189k in this red season because my Financial Advisor figured out Defensive strategies which help portfolios be less vulnerable to market downturns
My advisor is ‘’Julia Ann Finnicum’’ she’s highly qualified and experienced in the financial market. She has extensive knowledge of portfolio diversity and is considered an expert in the field. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market
thanks for sharing this, I googled the advisor you mentioned and after going through her resume, I can tell she's a pro. I wrote her and I'm waiting on her reply
LOL THIS IS A FAKE CONVERSATION. This is a scam. One person is posting as multiple people to make you think someone is asking about an "advisor". It's all fake, guys.
I tried to go on your website to schedule a 30 minute free consult, but when it came to taking a timeslot, there is nothing available. I would prefer not to submit all my sensitive information when there is no appointment that I can make with your tax professionals. Great UA-cam video by the way.
EXCELLENCE!! So, thankful my Brother enlightened me on all of this awhile back. QUESTION~ If you rent a below market value unit AND your other income is strictly SSI - do you even have to file returns? Not sure I want to know answer, lol!
Correct me if I am wrong, but if I am a real estate agent, but I do NOT own rental property, just a personal property - I would NOT be able to apply depreciation against my W2 and 1099 income?
Omg! Where have you been my entire life? I just saw this video and looking forward to seeing the rest, I'm already loving you. Great, awesome content!!!
Everything you mentioned is correct, how ever you need to be really careful. Depreciation does help considerably to reduce taxable income or even to claim a lost, how ever it also reduces your baisis meaning, you might have to give it back when selling the real estate.
I’ve interviewed a few cpas and they all say losses are capped at 150k AGI and have to be a REP to get pass thru losses on all types of investment properties including STR
You have a gift for teaching. I’ve watched many other videos but you know how to connect everything in a way its much simpler to understand. Glad i found you. Thanks
Karlton - awesome info! 1. If my AGI is under $150k am I able to use passive losses against my ordinary income w/out being a REP? 2. I am working almost every night on our rental property, drywall, paint etc. Would I qualify as a REP if I am doing all the repairs on my rental property?
@@mtigress4589 i make about 95k a year gross. Can i make a cost segregation study on my property and use the results to reduce my w2 since I'm making under 150k a year?
Hi Karlton. Thanks for sharing this information. I am thinking about investing in a 37 unit JV out of state. All 6 partners have a percentage of ownership, voting rights, sign on the loan and an active role. My role would be to prepare and update the financials. Would the hours spent in this role count towards material participation? Thank you!
I have an high income W2 job and own a short term airbnb. I used an equity line on my primary residence as a down payment and implements on my rental. Can I deduct all interest and rental expenses against my primary income? We meet the 100 hour participation standard.
Clearly, everyone's tax situation is unique and different. Isn't it true that once you become an REP (real estate professional), once you go to sell that asset (rental property), the gain is now taxed as ordinary income VS the much lower rate of capital gains? Serious consideration to weigh. Keep up the excellent videos! 🙂
Capital gains when you sell a rental property are still taxed at the (lower) capital gains tax rate when you sell a property, regardless of whether you qualify as a real estate professional. I'm trying to think of what you might be thinking of, and it might be that your gains when selling a property can be taxed as ordinary income if you are in the business of flipping houses. In that case it would be considered ordinary income, and not capital gains. (I'm a Austin, TX based tax advisor specializing in taxes for real estate investors.)
It seems like the average stay required to qualify can be increased to 30 days by providing "significant personal services." ( IRS Publication 925 (2022), Passive Activity and At-Risk Rules). Based on the description it sounds like at-request house keeping would qualify.
I understand your interpretation of the section.. but i know the IRS in fact audits for that and does not allow it even for short term rental. their current audit guideline is that losses are limited to the specific activity so even losses from a side business don't seem to reduce w-2 or at least thats how they pressure during audits. dont know if a tax court would hold different. have you seen this actually survive an audit?
Good tips. Only problem is that these cost seg benefits are mostly one time use and hard to re-up as most people don’t have another $100-200K for a down payment or financing capacity as a seasoned professional, per bank not IRS standards, to buy more rentals every year.
This was everything. I even laughed out loud a few times when you dropped major gems. I am soo thankful for this. I feel like I'm understanding a foreign language. Great job!
A vacant house bought in 2014. Obtained required permits to demolish and rebuild. New building is planned to be completed as multi unit rental in fall of 2023. I have never reported this property on my taxes. Question: When property becomes rental and added to sched-E, will all the purchase price, real estate taxes, maintenance permit in construction etc paid sofar considered part of base cost?
Does anyone know if the 150k passive loss rules exception doubles for married couples to 300K? If it doesn't, getting married to someone that brings your combined AGI over 150k could really hurt.
You are literally blow mine mind right now Karlton. I have been thinking about opening a business, now I have a clearer view on what to do thanks to you...
we bought a new House me and my husband and our previous house was being rented as of this moment. this is really good information, i want to know more cause this is the first time we are filling with 2 houses in our taxes.
So can you buy a rental property and rent it to yourself? Like if you bought a duplex and rented out both halves one to yourself and one to a neighbor or some such?
I read the IRC Section 469. There is no a word talking about the short term rental. I believe you are talking about Airibnb rental which is not treated as RE at all. Please let me know what language in the code indicates the short term rental rule.
Would writing off a kitchen remodel as an expense for the year be less favorable than having a costs segregation study completed once the work is done?
very nice. The short term rental piece is the piece I was missing. Presumably, a 'short term rental' is not classed as a residential property therefore 39yrs depreciation?
I put a non residential building into service in 2022. Can I go back and do Cost Segregation on this? $250K for the building not including land and separate two car garage.
I am going to be travel nursing next year. With all the increased income, I am interested in finding how to advantage as much of my money towards growing my wealth while saving as much as I can on taxes. How would you attack my situation?
Can you determine how much to offset each year or control that amount once you start, if you want to offset more one year v the next assuming you have enough losses to cover?
You are the best! I love how you explain things. I just discovered your channel about a week ago and I’ve been binging on your videos. I love this one, especially. But I love them all actually. ❤❤❤❤❤❤❤❤❤
Does depreciation start when you rent or when the home was built? Also what if it was rental property before but now a become a homeowner occupied but soon be a rental again. How does that work?
Great education! What are other options if I have my property being managed by a professional property management? Can I still use the passive income deduct W2? Thank you
This might be a tougher thing to do. But what if your an Investor in a property. Not on Title, but helping putting money in. Materials & Time etc.. Can you write anything off?
How literal is < 7 days. For example do 7.090909 days, 7.289474 days, 7.525 days etc technically exceed it or is it rounded up or down based on decimals rules like in mathematics.
![How to Use Rental Losses to OFFSET W2 Taxes! [Part 1]](http://i.ytimg.com/vi/1a38vrvO-ko/mqdefault.jpg)
![How to Use Rental Losses to OFFSET W2 Taxes! [Part 1]](/img/tr.png)
It's time to acknowledge that a return to 3% mortgage rates may be unrealistic. If homeowners are forced to sell, we will likely see a drop in home prices, leading to lower property valuations. I know I'm not the only one who shares this outlook.
If you're in the market, now is the time to buy. Home prices are unlikely to decrease further, and if interest rates do decline in the future, refinancing is always an option.
In my opinion, home prices need to decrease by at least 40% before the market finds balance. For those unsure about buying property right now, seeking advice from an experienced financial advisor for optimal portfolio allocation is crucial. This approach has worked for me-I’ve managed to stay profitable over the past five years, accumulating nearly $1 million in investment returns.
@@FrankJaaay That's impressive! I'd be happy to share more details. I understand the hesitation, especially when it feels like many firms offer similar services. However, finding a trustworthy advisor has been key to my success.
Rebecca Lynne Buie has consistently been my top recommendation. She’s widely recognized for her expertise in financial markets and has a strong track record. I highly recommend her.
I am 46 and working for 22 years now. This is by far the most useful video for tax saving on UA-cam, period.
I’ve done research over the past year so I already knew this but the way you explained it made it so much easier and would have saved me countless hours if I saw this first. Keep crushing it brother!
I appreciate the existence of tax breaks but navigating loopholes feels dangerous. How can I ensure I'm taking advantage of tax-advantaged investment structures without potentially encountering unintended consequences?
Loopholes can be tricky, but there are plenty of proven tax-advantaged structures. IRAs and employer-sponsored retirement accounts are great options. You can also explore tax-efficient investment vehicles like municipal bonds or index funds. These offer benefits like tax-deferred growth or tax-exempt interest. Talk to your financial planner about these options.
Yeah, planners could make a lot of difference, particularly in a market such as this. Bonds are pretty unstable at the moment, but if you do the right math, you should be just fine. Bloomberg and other finance media have been recording cases of folks gaining over 250k just in a matter of weeks/couple months, so I think there are a lot of wealth transfer in this downtime if you know where to look. I have been using an FA since 2020, and I return at least $30k ROI, and this does not include capital gain.
Could you kindly elaborate on the advisor's background and qualifications?
I work with Sonya Lee Mitchell as my fiduciary advisor. Simply look up the name. You would discover the information you needed to schedule an appointment.
I searched her up, and I have sent her an email. I hope she gets back to me soon. Thank you
I spent 10 years in the consulting practice of a large accounting firm. I am not saying this video is wrong, but one BIG thing this video does not mention is that the depreciation taken lowers your basis in the asset. When you sell the asset you now have a higher gain and pay more taxes. There is something called 1250 recapture which taxes that portion of the sale at higher rates than normal capital gains. You CAN benefit from the rate arbitrage between ordinary losses and 1250 gains, but because depreciation was taken more gain will be recognized later and at a higher rate.
Agreed but that's when you need to get into 1031's, stepped up basis, Deferred Sales Trusts, Delaware Statutory Trusts, Spendthrift Trusts etc
@@samuelhartzog7209 and then you might avoid taxes, but spend a mountain of money on an army of attorneys and title companies to draft and perform all of this. And 1031 doesn’t eliminate anything, just kicks the can a little farther down the road.
@@samuelhartzog7209can I hire u
when you mention trusts, you have my attention. Thanks. I will research your info.
The “excess business loss” rules in IRC 461(l) were amended by the CARES Act in 2020. These rules prevent you from using business losses from pass through entities (partnerships, s-corps, LLC’s, sole proprietors. Etc.) to offset W-2 income. It does not matter how active you are. If you exceed the income threshold you cannot offset W-2 income with business losses.
Real estate professional status does help here
@@zakshuman8450 IRC 461(l)(6) says that the excess business loss rules shall be applied after the limitations of IRC 469. IRC 469 is where the passive loss rules are codified and includes the “real estate professional rules”. The excess business loss rules are generally agnostic to the income type. The only exclusion to the excess business loss rules I know of is certain farming income/losses for certain years. For a single taxpayer the most business losses you can uses in a year is $250k (plus a little for inflation). So if you have a 500k W-2 and a real estate or other business loss of 500k, you would still owe tax on 250k. This is the w-2 income minus the maximum business loss (250k for single for 500k for married filing jointly). Any excess loss is carried forward as a net operating loss which has other limitations in subsequent years.
@@paulmorrow8372 but this only applies to those owing over $250k on W2 taxes correct? If so everyone under that threshold should still be able to do what the guy in the video is explaining.
WELL ACTUALLY ERASING 250K OF YOUR W2 INCOME NOT 250K OF TAXES, ALL DUE TO THE BUSINESS LOSSES GAME. BUT WHAT THIS GUY IN THE COMMENTS IS SAYING REALLY HAS NO REAL RELEVANCE WITH 99% OF THE POPULATION. THIS 250K LIMIT I’VE NEVER EVEN HEARD OF IN MY 7YRS OF DOING THIS, SO I HAVE TO LOOK INTO THAT TO SEE IF ITS BOGUS OR NOT. NOW EVEN IF IT WERE TO BE TRUE THAT YOU COULD ONLY WRITE-OFF $250K OF W2 INCOME FROM BUSINESS LOSES, THAT’S NOT INCLUDING THE OTHER WRITE-OFF’S THAT’S NON BUSINESS RELATED. YOU CAN VERY WELL WRITE-OFF ANOTHER $100K IN NON-BUSINESS REALTED WRITE-OFF.’S AGAINST YOUR W2 INCOME. AND WIPE OUT $350K OF W2 INCOME. THEN YOU COULD START AGAIN WITH YET A 2ND SEPERATE BUSINESS WITH WRITE-OFF’S. AND ON AND ON AND ON…. THE THING IS YOUR ALSO NOT PAYING ANY TAXES ON THE BUSINESS INCOME IN ADDITION TO THE W2 INCOME. AND EVEN IF YOU DO WIND UP PAYING ANY TAXES ON THE W2 INCOME, THE OVERALL TAX SAVINGS WOULD BE ASTRONOMICAL IN COMPARISON TO THE NONSENSE TAX THAT YOU’D PAY.
Can we schedule a 1x1 meeting ?
I am only 17 and turn 18 in a few weeks. Have learned so much from you and can't wait to start using all the information you have taught me. In the future I plan on being one of your clients.
Good luck youngster. I wish you much success in life with your rentals and your businesses.
Buy a duplex, triplex, etc as your first home. House hack. Live in one side and rent out others. This will allow you to save money for another property. Rinse repeat. Wish I did it long time ago.
@@KayakDIY bad advice. Duplex comes with a lot of headache with maintenance and tenants especially if they don’t like each others.
Single homes in good neighborhoods is the best. Don’t ever invest in the hood. You can also buy distressed homes and fix them ( but if you don’t know what you are doing contractors might still money from you). I now buy ready to use and do minor works.
Learn the tax systems and not just be a client let him teach what you’re not gonna ever have a chance to learn in school.
@@Anonyme67 wrong
There's limitations to all of this tho. Your tenants have to be less than 7 days on average (essentially must be airbnb or the like). I'd also assume that you can only depreciate an item in your home once. Meaning if you depreciate over a short number of years, after those years have passed, you can no longer claim a loss every year. How many airbnb rental properties truly have 200k per year of itemized depreciation as in the example? This video is a good concept but only applies to a small subset of people and most likely does not generate as large of a tax write off as the example implies
This guy is full of bad advice.
It's not bad advice but the original comment is correct.. this will work in year 1. Once you've done the cost seg you need a new property to do it again. Also, the STR is work. And much riskier than owning a straight up rental which would be considered passive.
I have a very experienced CPA, have for years. I showed her this video. And she smiled. The only question that came out of her mouth was, a $200,000 loss? When would that happen? you’re certainly not going to consecutively have a loss on a house of $200,000 every year. So is the game to stay under that seven days occupancy and make the house a failure?. I don’t think you define clear enough if the rental property should be successful, or it should be a complete failure for the tax write off. Because if you’re running a normal even mediocre short-term rental you’re not going to have a $200,000 loss. So is the goal to buy a property not to make money and only to use for a tax write off?
I think it’s important you tell people this isn’t a situation for everyone. I know you have another videos but in this video and others I would make sure people understand that you just don’t go out and buy a property and automatically get a right off. It isn’t that easy. You have to work at that house to be a failure if that is what you’re trying to accomplish. And then the question becomes what am I really saving if the house is a failure? like the concept understand the legality‘s and the tax, but I’m completely missing the real world example here.
Karlton is introducing the concept while promoting his business. My take-away is that loss from short term rental is not passive loss and that can offset our W-2 income. $200K loss from STR is ... misleading, even if cost seg. is applied. Thanks for sharing your thoughts. Karlton did a good job overall.
I have never wanted to yell at a UA-camr this much while watching. He is nothing but a snake oil salesman. As if our goal is to lose money. We are not investing to lose money, we are investing to make money. Also, I can’t believe he said W-2 employees work 8 thousand hours per year.
such a legend. man the tax code was invented for us to utilize not fear. thank you for doing your research and delivering to us. the value you bring with every video is enormous. Thank you Karlton
I’ve listened to a lot of financial advice on UA-cam. This is the best. No BS, no repackaging obvious facts as insightful. This is just great stuff and 100% useful and not obvious.
You are the ONLY one who makes this look like fun. In the middle of filing taxes right now and I feel like I got some really valuable information from this video. Thank you so much. ☀️
Karlton I’m a cost segregation study provider and this is the best video I’ve seen that accurately defines cost seg while also showing the tax benefits to be found in real estate.
Hey quick question should the realestate be acquitted under personal or would it be best to acquire them under your llc
@@ericboco3029 This type of LLC is a disregarded entity when it comes to taxes, so it doesn't make any difference in terms of tax strategies. So the decision about whether to hold your properties in an LLC would be based on whether you might get at least some partial liability protection from having it in an LLC. (I'm a tax professional, but not a lawyer.)
Even if you have a short term rental, you have to prove material participation, otherwise, it would still be considered a passive activity. The rules for material participation that you mentioned were for qualifying as a real estate professional.
Listed below are the test for material participation. You would need to satisfy 1 of the 7.
1) The individual participates in the activity for more than 500 hours during the year.
2) The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year.
3) The individual participates in the activity for more than 100 hours during the taxable year, and such an individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year.
4) The activity is a significant participation activity for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours.
5) The individual materially participated in the activity for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year
6) The activity is a personal service activity, and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year.
7) Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during such a year.
Please don't take advice from the internet and consult your tax advisor.
....and, as a REP, when you sell the asset, it's taxed at the much higher rate of taxes, ordinary income tax, rather than the passive capital gains tax. Something everyone needs to line up with their own financial situation and weigh the benefits vs. long term tax ramifications.
@@idahohousehunter from what I understand the IRS stills calculates the allowed depreciation per year whether you took it or not. Deciding to opt out of writing off depreciation doesn't get you out of the ordinary income taxes you will have to pay when you sell.
@@dracox3108 Yes, but using strategies like cost segregation and bonus depreciation will increase the amount of depreciation that you are "allowed to take" essentially. Using these strategies does dramatically increase the amount of recapture that you have to pay back when you sell the property. Basically, there is no escaping the reality that any depreciation you take, you do have to repay as recapture (except for a couple exceptions such as a 1031 exchange, or holding onto it until your death and passing it on to an heir).
@@idahohousehunterthere is another whole aspect to this video, which will then follow up with a 1031, to avoid recapture tax.
I am trying to do this now, it is amazing how many CPA's do not know about this and are fixated on your method without the loophole or know nothing about it. I am actually teaching CPA's when I talk to them and I am nothing close to a CPA or tax professional. I just watched KD. Wish your firm KD was more affordable for those just starting off though. Would love to use this guys firm but they want at least $10k.
Karlton you mentioned about the $600K property you bought generated a $200K paper loss can you explain how that $200K became paper loss?
Great question. I thought more people would ask about this.
protip: you glossed over it, but AGI is a beautiful concept too. It doesn't matter how much you made, if you can create enough deduction to get under the $150K AGI, then those additional deductions start applying to you too. The government sent me stimulus checks because my AGI was below $75,000 or something (didn't ask, didn't have a way to deny, definitely had a use for the money). But just like this video picks apart the definition of "materially participate" there is room to pick about what AGI is.
I am just starting my financial literacy, and I would love any insights you might be able to offer. What city are you located in?
If i make under 150k AGI can i deduct my estimatrf property cost segregation study without having to do short term rentals?
@@bato-wm5gl Yes. If you make under $100k, you can deduct up to $25,000 of rental losses per year (including losses that came from cost seg). The amount you can deduct phases out if your income is between $100k-$150k (so for example, at $125k of income you can deduct $12,5000/year). I do think that so many of these videos don't mention that because their income is above the limits for that exception, but it's a great deduction for a lot of people. I'm a tax advisor specializing in taxes for real estate investors (located in Austin TX).
You are correct in stating short term rentals aren’t classified as rentals by the IRS, however, they are still a business and the owner needs to show material participation to leverage losses.
Please read the Passive Activity Loss (ATG) again. This is clearly stated in chapter 2 page 3.
Remember, Depreciation, is not a permanent deduction. You'll have to pay the piper one day when you sell, unless you 1031 it, then you'll have it there when you sell. The only way to make depreciation never payable, is when you die and your heirs get it and under the current guilde lines they inherit it tax free through the STEP UP program.
That’s why most smart people don’t sell their real estate unless they 1031 exchange.
@@mra.4466 still doesn’t get rid of the depreciation, just transfers to the new property.
@@WoodUCreate that’s fine. If you don’t sell it and pass it on it’s a step up in basis as you mentioned the goal should rarely be to sell rentals if they cash flow and are in good areas anyway if you are a buy and hold investor.
James, completely agree. I find most of the people on here with an opinion say what they think “in theory”, without ever having done it. A 1031 is complicated, and I can tell you most people do not sell using a 1031.
New to real estate investing and I can't get enough of this guy. Keeps it simple and explains things well. Awesome service you are doing!
Very well done, Karlton. You take boring (but important) topic and make it fun to watch. BRAVO.
agree
Exact video/training I was looking for, for a long time. I learned more in this one video than all the videos I watched in the last 6 months. Thank You
My mouth is on the floor. I just rented my unit as a long-term rental, and now I regret it. I thought I'd meet the requirement because I am self-managing (I live next door). I'm happy I found you, I'm crying that I didn't find you earlier.
your a Patriot bro...glad to have a soldier like you . you live not only to had value to your life , but demonstrate the true servitude.... adding value to life of your fellow neighbors... PATRIOT!!
I feel so blessed finding this page. The universe is responding.
I love how hyped Karlton gets about his own knowledge 👏 awesome!
Excellent explanation! Being a physician with minimal Tax knowledge, this was very easy to understand !
Thank you Karlton, you explain thing so clearly even a dumm can understand and on top the knowledge you are giving us is AWESOME!!!! Thank you
in order to have -200k loss from income - exp - depreciation, you need $5.5mill property value, with 0 cash flow monthly. $5.5m/27.5 = 200k. Note $5.5m can't include land since land does not depreciate
This is really good! I need to go back and look at mine again because i actively manage my property but they said i still made too much money to deduct my passive losses from my income.
I am very much "getting" this and am super stoked that I stumbled on your mistakes with LLC's video with impeccable timing. Thanks for making this all available!❤
This is phenomenal!
Karlton, this video was amazing. This is exactly the kind of information I have been looking for. Everyone needs to listening to this.
What was not discussed or mentioned is if an individual has say 4 rental (long term) properties and 1 airbnb (short term) does that 1 short term now include the long term passive income offsets against non-passive income? That wasn't mentioned.
How about the unrecaptured depreciation at the time of sale?
Please go into more detail on the 200k in losses. That doesn't seem possible yearly
i have the same thought, how does the 200k coming from ?
Need this man to do my taxes.
Karlton is a geat teacher, explained this very well.
Only works if the real estate income is in your social security number. If real estate is in LLC, taxes filed separately
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It's a delicate season now, so you can do little or nothing on your own. Hence I’ll suggest you get yourself a financial expert that can provide you with valuable financial information and assistance
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You are God sent. Thank you for allowing Gos to use you for those of us who need your expertise🙌🏽🙌🏽
I tried to go on your website to schedule a 30 minute free consult, but when it came to taking a timeslot, there is nothing available. I would prefer not to submit all my sensitive information when there is no appointment that I can make with your tax professionals. Great UA-cam video by the way.
GOAT ... that's all. I've been learning taxes for a little while but this my friend?! Finding your channel I've struck GOLD! GOLD YOU HEAR ME??
Can add all that to the residential property basis, so when you sell, your sales price and gain offset by higher basis.
Thanks, patting myself on the back and thanking God for stumbling across your channel. Great stuff!!!
EXCELLENCE!! So, thankful my Brother enlightened me on all of this awhile back. QUESTION~ If you rent a below market value unit AND your other income is strictly SSI - do you even have to file returns? Not sure I want to know answer, lol!
KD thank you for the info !!! I am you are sharing your knowledge…. God bless your vision so we can prosper!!!
Correct me if I am wrong, but if I am a real estate agent, but I do NOT own rental property, just a personal property - I would NOT be able to apply depreciation against my W2 and 1099 income?
Omg! Where have you been my entire life? I just saw this video and looking forward to seeing the rest, I'm already loving you. Great, awesome content!!!
Thank you! I look forward to seeing you on the challenge www.thetaxfreewealthchallenge.com
Everything you mentioned is correct, how ever you need to be really careful. Depreciation does help considerably to reduce taxable income or even to claim a lost, how ever it also reduces your baisis meaning, you might have to give it back when selling the real estate.
Unless you do a 1031 exchange and buy another property
I’ve interviewed a few cpas and they all say losses are capped at 150k AGI and have to be a REP to get pass thru losses on all types of investment properties including STR
The only video on you tube that breaks this down so plainly and decisively. Thank you!!
Karlton you’re the absolute GOAT for anything taxes 🙌🏼
Appreciate it!
You have a gift for teaching. I’ve watched many other videos but you know how to connect everything in a way its much simpler to understand. Glad i found you. Thanks
Thanks for your comment ⬆️ Reach out to me for consultation and more tips on how to build your finances ✉️,
Would these be a few considered short term rentals?
- Month to Month
- AirBnB
- Renting a room?
Karlton - awesome info! 1. If my AGI is under $150k am I able to use passive losses against my ordinary income w/out being a REP? 2. I am working almost every night on our rental property, drywall, paint etc. Would I qualify as a REP if I am doing all the repairs on my rental property?
Sounds like you would, at least for that year.
If you are actively participating like that but dont qualify for REP you may claim up to 25k loss each year. It's phased out from 100k to 150k AGI
@@mtigress4589 i make about 95k a year gross. Can i make a cost segregation study on my property and use the results to reduce my w2 since I'm making under 150k a year?
@@bato-wm5gl def talk to your accountant about it
Hi Karlton. Thanks for sharing this information. I am thinking about investing in a 37 unit JV out of state. All 6 partners have a percentage of ownership, voting rights, sign on the loan and an active role. My role would be to prepare and update the financials. Would the hours spent in this role count towards material participation? Thank you!
I have an high income W2 job and own a short term airbnb. I used an equity line on my primary residence as a down payment and implements on my rental. Can I deduct all interest and rental expenses against my primary income? We meet the 100 hour participation standard.
Clearly, everyone's tax situation is unique and different. Isn't it true that once you become an REP (real estate professional), once you go to sell that asset (rental property), the gain is now taxed as ordinary income VS the much lower rate of capital gains? Serious consideration to weigh. Keep up the excellent videos! 🙂
Capital gains when you sell a rental property are still taxed at the (lower) capital gains tax rate when you sell a property, regardless of whether you qualify as a real estate professional. I'm trying to think of what you might be thinking of, and it might be that your gains when selling a property can be taxed as ordinary income if you are in the business of flipping houses. In that case it would be considered ordinary income, and not capital gains. (I'm a Austin, TX based tax advisor specializing in taxes for real estate investors.)
It seems like the average stay required to qualify can be increased to 30 days by providing "significant personal services." ( IRS Publication 925 (2022), Passive Activity and At-Risk Rules). Based on the description it sounds like at-request house keeping would qualify.
Glad to see someone went to the tax code! Let me know if I can be of any help brother 💪🏾
My uncle greatly contributed to congress implementing law preventing passive losses against earned incime
My question is, What if you purchased a rental property that’s owner financed? How would this work and how long?
DEPRECIATION RECAPTURE! Please look up section 1250 recapture rules and also case studies on a "real estate professional"
America is a beautiful place!! Taking notes!! Thank you sir!! 🙏🏽
Karlton, great content! Keep them coming Sir...
I understand your interpretation of the section.. but i know the IRS in fact audits for that and does not allow it even for short term rental. their current audit guideline is that losses are limited to the specific activity so even losses from a side business don't seem to reduce w-2 or at least thats how they pressure during audits. dont know if a tax court would hold different. have you seen this actually survive an audit?
Good tips. Only problem is that these cost seg benefits are mostly one time use and hard to re-up as most people don’t have another $100-200K for a down payment or financing capacity as a seasoned professional, per bank not IRS standards, to buy more rentals every year.
The losses carry over to the next year
This was everything. I even laughed out loud a few times when you dropped major gems. I am soo thankful for this. I feel like I'm understanding a foreign language. Great job!
Thank you. Can’t wait to have some one time with your team.
A vacant house bought in 2014.
Obtained required permits to demolish and rebuild.
New building is planned to be completed as multi unit rental in fall of 2023.
I have never reported this property on my taxes.
Question:
When property becomes rental and added to sched-E, will all the purchase price, real estate taxes, maintenance permit in construction etc paid sofar considered part of base cost?
That was a fantastic video! You broke it all down in a way that was super easy to follow, thank you!
Does anyone know if the 150k passive loss rules exception doubles for married couples to 300K? If it doesn't, getting married to someone that brings your combined AGI over 150k could really hurt.
You are literally blow mine mind right now Karlton. I have been thinking about opening a business, now I have a clearer view on what to do thanks to you...
we bought a new House me and my husband and our previous house was being rented as of this moment. this is really good information, i want to know more cause this is the first time we are filling with 2 houses in our taxes.
So can you buy a rental property and rent it to yourself? Like if you bought a duplex and rented out both halves one to yourself and one to a neighbor or some such?
1. The median income is less than 150k
2. Does the study cost a lot?
I read the IRC Section 469. There is no a word talking about the short term rental. I believe you are talking about Airibnb rental which is not treated as RE at all. Please let me know what language in the code indicates the short term rental rule.
Would writing off a kitchen remodel as an expense for the year be less favorable than having a costs segregation study completed once the work is done?
very nice. The short term rental piece is the piece I was missing. Presumably, a 'short term rental' is not classed as a residential property therefore 39yrs depreciation?
I put a non residential building into service in 2022. Can I go back and do Cost Segregation on this? $250K for the building not including land and separate two car garage.
Nice video. You mentioned that working 40hrs a week is over 8000hr a year. It's actually (40*52=2080) timestamp 17:23
Well my day just got better. I just bought a short term rental and I paid way to much in taxes last year.
Love it dude, looking forward to our call next week.
Awesome!! Thanks, will get in touch with you in time !!!
I am going to be travel nursing next year. With all the increased income, I am interested in finding how to advantage as much of my money towards growing my wealth while saving as much as I can on taxes. How would you attack my situation?
Can you determine how much to offset each year or control that amount once you start, if you want to offset more one year v the next assuming you have enough losses to cover?
You are the best! I love how you explain things. I just discovered your channel about a week ago and I’ve been binging on your videos. I love this one, especially. But I love them all actually. ❤❤❤❤❤❤❤❤❤
One of the most important videos I watched about how to leverage RE tax benefits... Thank you so much for putting this together. Super helpful!
Glad you enjoyed it!
Does depreciation start when you rent or when the home was built? Also what if it was rental property before but now a become a homeowner occupied but soon be a rental again. How does that work?
I loved the way you presented this information - the graphics and visuals really helped me understand the topic better.
It’s 3am and I’ve binge watch 3 straight hours of your content. You have saved me $150k. I owe you brotha. Thank you.
Great education! What are other options if I have my property being managed by a professional property management? Can I still use the passive income deduct W2? Thank you
Great video. Super informative - even as a former tax preparer. But just fyi, 40 hours/week = 1 FTE = 2,080 hours/year - not 8,000 hours/year.
I do agree with Markfisher the way you explained it made it easy. Congratulation good job.
Please let me know if this is possible with owning and managing a remote self storage facility.? Very interesting
Wow. You put it all together so beautifully! You are great!
How is passive rental income taxed in a LLC? How to avoid self-employement taxes on LLC passive rental income ? Thank you
This might be a tougher thing to do. But what if your an Investor in a property. Not on Title, but helping putting money in. Materials & Time etc.. Can you write anything off?
How literal is < 7 days. For example do 7.090909 days, 7.289474 days, 7.525 days etc technically exceed it or is it rounded up or down based on decimals rules like in mathematics.
Feeling so lucky to have found your Channel. Thank you
Managing a property counts as Real Property Trade, but what if I pay a property manager? Could those expenses be deducted?