RENT Magazine Q3 '22

MAKING ACTIVE INCOME PASSIVE ISN’T AS DIFFICULT AS YOU MAY THINK.

TAKE FULL ADVANTAGE OF PASSIVE LOSSES 2

I frequently see investors who miss out on the benefits of cost segregations simply because of poor tax advice. Tax advisors sometimes tell their clients that they don’t get the benefits (i.e., tax losses) because the losses are passive. It’s true that rental real estate losses generally are passive, in which case they can only offset passive income. So, either the taxpayer needs to become a real estate professional (a simple test that only one spouse has to meet) or they need to convert their active income (such as the income from their business) to passive income.

Making active income passive isn’t as difficult as you may think. Simply transferring ownership of a portion of the entities owning the business and the real estate to a family member (e.g., children or elderly parents) may do the trick. You retain control and still get the tax benefits of the real estate losses. While a simple concept, it does require a sophisticated understanding of the tax law, so don’t do this without your tax advisor. You want someone in your corner who understands this proven tax reduction strategy and will work with you to ensure all the details are covered.

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