The Best Ever CRE Show JF 4095: The 3 Types of Income Every LP Must Understand
Nov 20, 2025
Pascal Wagner dives into the IRS's three income categorizations: active, portfolio, and passive. He highlights common pitfalls, such as the misconception that real estate depreciation offsets stock market gains. A key takeaway is the rule that losses must match income types. He also discusses exceptions for high earners, like oil and gas and opportunity zones. By shifting income to passive categories, investors can enhance tax efficiency. Ultimately, Pascal encourages aligning investments with tax strategies rather than simply seeking high returns.
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Three Distinct Income Buckets
- The IRS sorts income into three distinct buckets: active, portfolio, and passive.
- You can only offset income with losses from the same bucket, so cross-bucket offsets generally don't work.
A $40,000 Tax Wake-Up Call
- Pascal recounts receiving an unexpected $40,000 tax bill due to poor tax planning.
- That surprise pushed him to learn tax strategy and manage investments for long-term efficiency.
Don't Count On Depreciation For W-2 Taxes
- Do not expect real estate depreciation to wipe out W-2 or business income unless you meet rare exceptions.
- Check if you or your spouse qualify as a real estate professional or consider specific oil and gas deductions before relying on offsets.