Tax Reduction Podcast

Episode 6. START Claiming Your Rental Losses AGAINST Your Business Income

• Boris Musheyev

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Interested in Tax Strategy for your Business? Send us a message with your email address and we’ll help you get started!

Are you an S-Corporation owner with rental properties? 

You can START Claiming Your Rental Losses AGAINST Your Business Income. 

Listen in on this episode to understand how to smartly use passive losses from your rental properties against your business income. In the dynamic world of investing, harnessing passive income to balance passive losses is a game-changer. This episode  offers a step-by-step strategy for S-Corp owners to maximize their investing advantages by leveraging rental losses.

Key takeaways:

✅ Navigate passive losses from rental properties for business owners
✅ Optimize passive income streams to counterbalance business income.
✅ Master the art of investing in rental properties for balanced financial outcomes.

Boost your investing prowess, refine your passive income strategies, and master S-Corporation advantages with this latest episode.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/

Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/

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P.S. When you sign up for Gusto, you get a $100 Visa gift card

*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

If you own a business and now you start generating tons of profit in your business, you can actually take that profit, invest it in real estate, generate pretty handsome losses in real estate while still being cash positive right, taking those losses and deducting it against your business profit. As a matter of fact, this is one of the biggest tax reduction strategies that the rich and the wealthy use, but without knowing how to actually do this, following the IRS tax code will hurt you a lot and will not allow you to take those losses. I will show you exactly how to use a tax strategy of taking your business profits, investing it in real estate, generating those losses and deducting it against your business income. Ready, let's go.

Speaker 2:

Welcome to the Tax Reduction Podcast for Money-Making Entrepreneurs with Boris Moushev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

Now, before I can really tell you about this tax strategy and teach you how to invest in real estate in terms of tax savings and deduct those losses against your business income, we really need to understand the history, why IRS actually allows you to do so, so you can do this with confidence and you will be equipped with information to be able to do this. But we have to get started with some basics. Now let's go back to 1986. As a matter of fact, before 1986, it's really really important for us to understand this tax code. Before 1986, what happened is that IRS allowed you to take all the losses that you invested from the real estate and deduct it against your business income, your active income, Meaning to say here's an example. Let's say your business generated a $500,000 profit. Then you invested in some real estate. You, being the business owner, start generating some of the profits. You don't know what to do. You want to start building wealth, so you start generating in real estate, specifically rental. Those rental real estate start generating you loss and in our example it's $300,000 loss. Before 1986, you could actually take the $300,000 loss and have a taxable income in our example of $200,000. That's it. So, basically, you made $500,000, you bought some real estate used depreciation, got a loss and now we're able to deduct this loss. After 1986, we had what's called a Tax Reform Act of 1986. Irs said hold on a second, let's put a hold on that. This is a huge tax shelter. We're not going to let them to do that anymore. Done deal, Okay. Tax Reform Act of 1986 changed the game for a lot of high earners and the business owners. Now, coming back to our example, if you had $500,000 of income, $300,000 of loss, well, guess what? That $300,000 was now considered a passive loss. That means you walked away paying taxes on your entire $500,000 and not being able to deduct the $300,000 loss. That was after 1986, the Tax Reform Act of 1986.

Speaker 1:

In 1994, ladies and gentlemen, Congress realized that this was not fair. Okay, this was not fair. They're like all right, we put this limitation so that other business owners who are not actively participating in real estate cannot take this loss. What about those that are actively participating in real estate? Or their spouse is actively participating in real estate? Or, as a matter of fact, what if a business owner wants to start investing in real estate? We gotta give them an incentive. So in 1994, they passed. They added excuse me, they added IRC, section 469. And I will tell you about this more right after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Boris put together a free PDF for you, the business owner Seven tax write-offs every S corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

Welcome back Now let's talk about what happened in 1994. So in 1994, they passed the. They added IRC section 469C7. That basically said, for some of the real estate professionals, even if you're a business owner, the more I will explain to you how you can be considered the real estate professional even if your business is not real estate. Okay. But basically the IRS and the Congress and the whole government said, all right, passive losses will now be considered active losses. That means right here, where we had our $300,000 loss can actually be considered active loss if you do certain things in your financial situation, in your business. Whoa, what just happened over here?

Speaker 1:

1994, things changed around. Irs is on your side and if your tax advisor I hope you have a tax advisor is telling you that the IRS is on your side, then I'm telling you right now you're working with the right tax advisor. But if you're working with a tax preparer who just puts the right numbers in the right boxes to say you can't take these losses, there's nothing you can do. All you do is earn money and that's a good problem to have pay your tax, you're working with the wrong tax person. All right Back to us. The only person that can save you, help you save money on taxes, ladies and gentlemen, is a tax advisor, because a tax advisor would know a tax law like this.

Speaker 1:

Now let's come back to this Now. In 1994, they passed the law and they said look, if you are a real estate professional or you can qualify to be a real estate professional we're gonna talk about a tax strategy shortly that means your passive losses can now become your active losses. In order for you to meet the real estate professional status, you have to meet two tests. That means that more than 50% of your personal services, meaning say everything that you do throughout the year, has to be in real estate space. That could be. You may be a real estate agent, or you may be a real estate investor, or you may be in construction or any business that involves a construction. It doesn't mean that you need real estate agents license or to be a real estate salesperson. Now, if you're a real estate salesperson, great. But if you're not, if you're a regular business owner, just like me, stick around. I'll show you how to qualify for this. Okay, Now, more than 50% of your time has to be spent in real estate. Okay, beautiful tax shelter. By the way, this is pretty much same thing, almost as the tax law before 1986.

Speaker 1:

Then they say if you are more than 50% in real estate, then you have to spend at least 750 hours in real estate. The reason they put 750 hour rule let's say a person doesn't have any other job, let's say it's a spouse, it's a spouse and the only thing they do is real estate. Irs says, well, you've got to meet a minimum participation hours in that real estate and that is 750 hours. So you got two tests to meet for real estate professional 50% rule and 750 hour rule. And this law was passed in 1994 and it's still active today and it's one of the most amazing and lucrative tax loss that we have for business owners and in our tax code to be able to help you save a lot of money on taxes. But probably a tax preparer is not talking about it. Okay, now we're back here. We got these two tests, we met these two tests. What does that mean for you? Now, if you meet these two tests, okay, you qualify as a real estate professional. You can actually take your rental loss and now take that as a deduction.

Speaker 1:

Now there is a third test that you have to meet. Let's say you meet the real estate professional and now you're like all right, now I want to start investing in real estate. Okay, now I want to start investing in real estate. By the way, if you're questioning and take bores, I'm a business owner. I don't meet the 50% rule. Stick around, don't worry, I'll show you how you can meet that in just a minute. But before we continue, I want to explain this point, because you need to meet the real estate professional rule in order for you to take your passive losses Once you start investing in real estate.

Speaker 1:

Let's say you bought a rental property number one. You bought a rental property number two, you bought a rental property number three and IRS says hold on a second. Now you have your own rentals and you're probably going to use a depreciation which we allow you to right. That's what the IRS says. Right, we will allow you to use the depreciation to reduce your taxable income. If you want to invest in your own properties and you want to take a loss from those properties, you've got to materially participate in that property, meaning to say you got to manage it, you got to take care of it.

Speaker 1:

Now, when you invest in one rental real estate, it's kind of hard to meet 500 hour participation rule. Right? Think about it If you invested in three single family homes, you can't participate possibly participate 500 hours in each single family. It would be like a terrible investment. If you spend 500 hours a year, irs says hold on a second, because we love you so much, the taxpayer, we're going to give you even more break. And they say you can combine the hours of your real estate and combine it all into 500 hours. So I'll give you an example. Let's say in your first rental property you participated 250 hours. In the third rental property you participated 100 hours, in a second and then third, 200 hours. If you combine it all, it's 550 hours. Irs says don't worry about it, you can combine it all. Just make an election on your tax return and say, hey, I'm combining it all as someone activity.

Speaker 1:

Irs goes out of their way to show you that you can save a lot of money on taxes and the only person they can speak to you about this is your tax advisor. So if you have a tax accountant that's really meeting with you once a year or really avoiding your phone calls, avoiding your emails, filing an extension for you, you are working with the wrong person. Ladies and gentlemen, in order for you to save money on taxes, especially if you want to start investing in real estate, in order to save money on taxes, you need to be working with a tax advisor. You need to speak to your tax advisor at least four times a year. Now Back to us All. Right now, let's talk about a tax strategy. Now that I've taught you everything that you need to know, let's talk about the execution of this tax strategy, and that is super, super important. We'll do it right after this break.

Speaker 2:

If all your accountant does is taxes, you may be overpaying in taxes by thousands of dollars every year. Every week, Boris releases a tax strategy on his podcast so that you, the business owner, can pay less in taxes every single year. Be sure to subscribe to our podcast to be notified when a new tax strategy is released. If you're ready to work with a tax advisor on your tax strategy and planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. Again, that's wwwtaxplanningcallcom.

Speaker 1:

Let's come back and let's talk about a tax strategy. Now that we have learned about how you can deduct real estate losses, let's talk about creating a tax strategy for yourself. You're already probably thinking, boris, I do not qualify as a real estate professional. Hold on a second. We're going to talk about how you can qualify as a real estate professional Before we talk about that tax strategy. I do want to note a couple of exceptions to the rule. For example, let's say you've had a property before already and you have been generating losses in it. Those losses, it's not like you can't take them. Well, you cannot really take them that particular year, but those losses get carried over to the future years. And the exception to the rule if you're not a real estate professional, you can actually take those losses against the gain when you sell the property. One of the exceptions to the rule is the sale of the property. Let's say you bought the property five years ago. You've generated $150,000 of losses. They were not deductible when you sell the property. The good news is that those losses can be deducted against any income or gain that you generated. If you did not have a gain from the sale of the property, you can still take those losses against your other income on your tax return. The second exception to the rule is that if your income is between adjusted gross income is between $100,000 and $150,000, you can actually take it up to $25,000 loss, even if you don't qualify for real estate professional, as long as you actively participate in your rental property. Those are two exceptions to the rule.

Speaker 1:

The biggest exception to the rule is a real estate professional. You might be thinking right now, boris, I've long learned everything about this. I spent 100% of time in my business. Well, guess what? I also spent 100% of time on my business. How can you and I, the business owners, make this tax strategy work for us? That is, if you are married Now, if you're not married, go out and get married. I'm kidding, all right, but what happens is that our spouse in most cases the business owners that I work with that have been coming to us for a tax advisory. Most of our clients who are successful business owners their spouse is not working, for whatever reason. The spouse is home or they're taking on the profits that another spouse that makes in the business. Totally okay, you can come to your spouse and be like hey, spouse, I've got a great tax strategy I've learned from Boris you can actually qualify as a real estate professional because if we start investing in real estate, we can actually generate those losses and deduct it against my business profits. So now your spouse becomes interested. And your spouse says how do we do that? Well, I want you to start getting involved more in real estate. We've got the money. Start investing in real estate, start looking for real estate and start spending more than 50% of your time.

Speaker 1:

The spouse that actually does not work for the business or doesn't have any job automatically qualifies for the 50% rule, because that is the only thing the spouse is doing which is in real estate. Now the second test that the spouse has to meet is 750 hours. They have to spend enough time in real estate investing in real estate, looking for properties, acquiring properties and being involved in that 750 hours. So now, when your spouse qualifies for real estate professional status, any losses generated from those properties even if the properties are owned together, jointly by you or just by your spouse any losses can be deducted against your business income. Now remember, we have to meet the material participation rule. That means when you start investing in real estate together with your spouse, that qualifies as a real estate professional. You have to materially participate in those Properties 500 hours.

Speaker 1:

Irs comes back and says we're gonna give you another break Like whoa. Irs says, let's say the real estate professional spouse only participated materially participated 300 hours in your three, four, five properties that you have. You did not meet the 500 hour rule. The IRS says hold on a second. How about the other spouse, the business owner? Did that spouse really help in the properties a little bit, just a little bit, to push it to 500 hours? If the answer is yes, voila, you qualify, meaning you can combine material participation hours.

Speaker 1:

Ladies and gentlemen, you need to work with a tax advisor, with a tax advisor that will give you strategic advice and line up your tax strategy investing in real estate so that you can generate those losses and deduct it against your business income.

Speaker 1:

But you've gotta work with a tax advisor so that you or your spouse can qualify for real estate professional status. Your hours need to be tracked. Irs looks at that like hold on a second, you're getting pretty big deductions. We're totally okay with that. We just wanna make sure you're doing it legitimately. So are you tracking your hours for material participation? Are you tracking your hours for real estate professional status, which is totally okay. Your tax advisor should be talking to you about it and documenting with you about it. But once this tax strategy is put in place, then it goes on autopilot. Real estate professional tax strategy. Investing in real estate to generate loss to deduct against business profit that tax strategy, once it's documented and implemented, it goes on autopilot and it starts saving you money every single year. As long as you're doing it strategically, ladies and gentlemen, until the next time, that's it for today's episode.

Speaker 2:

Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.