Do you own multiple rental properties? Do you spend a lot of time maintaining them only to come up with a loss at the end of the year? Although frustrating, there may be a solution for you!
With ever changing tax laws, it can be difficult to understand all the options available when dealing with the gains or losses associated with your rental; moreover, many people don’t know that they can only take passive losses to the extent that they have passive income. This means that although you have a loss for your rental properties (your passive income), you cannot take those losses on active income like your W2, 1099s, etc. For example, if you have earned $100,000 in salary and wages and you have a loss of $20,000 on your rental properties, you still cannot take the losses against your salaries and wages because they are two different types of income.
One potential solution would be to use IRC Section 469 (c)(7)(A), which outlines what it means to aggregate your rental properties into one entity if it is beneficial to you, and it would essentially convert your passive income into active income. Here is how: aggregating your properties is essentially treating them like one entity instead of individual entities. So, instead of passively participating in each entity, election 469 allows you to treat them all as one. For example, if you have spent a collective amount of 750 hours on the properties all together, you would have actively participated in them. Because this income (and loss) would now be active instead of passive, you would be able to take any losses on your active income as well. In many cases, it has helped our clients and given them a huge tax break. In one instance, our client saved over $20,000 in taxes by taking their rental losses.
One thing to note about this election: the election is permanent. You would only be able to opt out of the election if your participation in these entities changed drastically. If you were no longer materially participating, for example if you hired a management company for your rental properties, you could no longer take this election. Also keep in mind, this election does not free up any losses from prior years, only current years. The losses from prior years would only be freed up when every entity in the election is sold.
If this is something you think would benefit you, our team of professionals at ADKF, P.C. have extensive experience working with individuals across a wide array of circumstances and has access to financial resources and publications that can be used to help determine if making the election 469 is right for you.. Whether you are currently working through managing several rental properties or if you are contemplating purchasing several pieces of real estate in the hopes to turn them into rental properties, please do not hesitate to reach out to us for assistance.