$150K income stops depreciation deduction - Posted by Bruce

Posted by Chuck Rosenberg on September 05, 2005 at 15:37:10:

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$150K income stops depreciation deduction - Posted by Bruce

Posted by Bruce on April 25, 2004 at 19:38:36:

I have four rental properties that (with depreciation) could provide a paper loss that I’d like to use to reduce my declared income. My accountant is telling me that if I consider the properties investments than I can’t write off the losses because we make more than $150K. I’ve read that if I get a real estate license and say that buying and managing properties is my primary occupation (which I can easily do) then I can write off the losses but that the properties are no longer ‘investments’ but rather they are ‘inventory’ in a business that I actively run. He said that when I sell I’d be taxed at income tax rates instead of capital gains rates since these were part of a ‘business’.

If I am willing to become a ‘real estate professional’ and easily qualify as one and I forecast any selling I might do in the future to be as 1031 exchanges, why would I not want to take the deductions now? Is there any reason that I cannot or should not? My accountant seems to be saying that it would be better to carry forward the losses than to take them now (which certainly doesn’t make sense in the short term). It sure seems like I should be able to find a way to actively capitalize on the depreciation and get a reduction in my declared income now and yet still be able to move the properties in a 1031 exchange later without it being a taxable event. Any comments or suggestions regarding this topic would certainly be appreciated. I’d be interested in hearing the experiences of anyone with properties that net a loss with depreciation (either as a real estate professional or just as an investor) while having an income over $150K.


Misinterpretation? - Posted by randyOH

Posted by randyOH on April 25, 2004 at 23:42:56:

I suspect you may be misinterpreting what your accountant is saying. Here are some things to consider.

  1. You qualify under Sec 469(c)(7) to be able to deduct your rental losses by being in the “real property business.” That does not necessarily make you a dealer under Sec 1221(a)(1).

  2. If you are in the “business” of renting your properties, then you would not be considered a dealer under Sec 1221(a)(1).

  3. There are two requirements under Sec 469(c)(7) for being in the real property business:

(A) More than 1/2 of your personal services performed during a year must be performed in the real property business.

(B) You must perform more than 750 hours of services in the real property business during the year.

  1. If you are considered to be a dealer under Sec 1221(a)(1), you are not eligible to defer your gains under Sec 1031. So trying to do a 1031 exchange would not solve the problem of being considered a dealer. Furthermore, if you are considered to be a dealer, you would not be able to take any depreciation on your properties.


Re: $150K income stops depreciation deduction - Posted by John

Posted by John on April 25, 2004 at 23:19:53:

Time for a new accountant, my friend.