Lowering your AGI and keeping the real estate $25,000 passive income loss deduction
Posted on June 4, 2007
Filed Under Real Estate
I made some good trades in the options market this year. In five months, I turned $15k into $65k. So what could possibly be the problem? Taxes. The man. Trying to get into my pockets again. Under tax law, if one’s Modified Adjusted Gross Income (MAGI) is over $150k, that person can no longer any deduct passive rental losses. So by realizing my $50k gain in options trades, I would lose my $25k deduction in my real estate paper losses (not to be confused with the actual gains).
So what I did was transfer those open positions as a “gift” to other trusted individuals –who earn less than $100k per year. Then, these individuals would close the positions and pay taxes on the gains. The last step – you have to figure it out for yourself. By giving away these options, I preserved my passive rental loss deductions.
Finally, tax law states that if one spends the majority of his/her time in the real estate business as a real estate professional, rental losses are fully deductible, regardless of the MAGI . So to avoid ever having to run into this problem again in the future, guess who’s going to become a “licensed real estate professional” next year?
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Good points - Most of these personal finance bloggers all talk about investing and saving a few pennies, without addressing taxes, which takes a big chunk of income.
Taxes are a huge issue. However, alot of PF bloggers do not have very intricate financial holdings to warrant complex tax strategies.