Tax Smart Real Estate Investors Podcast 268. How To Turn Rental Losses Non-Passive Without Material Participation with Justin Shore, EA
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Apr 9, 2024 Tax expert Justin Shore joins the podcast to discuss the backdoor REPS strategy for real estate investors, allowing the transformation of rental losses into non-passive income. They explore maximizing tax benefits, utilizing passive income against losses, and navigating the complexities of the passive activity rules. The episode highlights innovative strategies for offsetting W2 income with real estate losses and introduces the backdoor REPS tactic in real estate investing.
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Passive Activity Rules and REPS
- Rental activities are passive by default, limiting the use of losses against non-passive income (like W-2 income).
- Real estate professional status (REPS) offers a solution but demands significant involvement in real property trade.
Backdoor REPS Strategy
- Offset W-2 income with real estate losses without REPS or short-term rental exceptions using "backdoor REPS."
- This strategy leverages the difference between ordinary income/losses and capital gains/losses.
Capital Gains and Passive Losses
- Capital gains have preferential tax rates (0%, 15%, or 20%) compared to ordinary income rates (24%-37%).
- Selling appreciated property generates capital gains, unlocking passive losses on Form 8582, offsetting AGI.