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Diane Kennedy
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- Aug 31, 2007
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Cat Man Du:
Let me run through a couple of scenarios:
Let's say you have taxable income of $150,000 (after your itemized deductions, exemptions, etc), but you know you have $50,000 of real estate passive losses. And because you know all about Real Estate Professional status and that if you qualify (and you made sure either you or your spouse qualified) that you can take the full $50,000 of loss against the income. So, you only have to pay tax on $100,000. I'm going to guess (without looking at the table) that you'll pay about $20,000 in federal tax on that.
But you discover you're subject to AMT! That means you can NOT take the loss against your other income, so you now have $150,000 that is taxable!
And worse yet, it's subject to the flat rate of 28%! So you'll now how to pay $42,000! in taxes.
Reg income tax: $20,000 AMT: $42,000
But, if we can prove that the real estate loss came because you were a real estate dealer, then it's a business. Because it's a loss there is no self-employment tax, and you're back paying tax only on $100,000.
****
Scenario #2
Real life example:
A guy hit it big on a property sale, quit his job, made sure he had no other income so he could only pay the long-term capital gains rate of 15% on his $1,000,000 gain on the property.
He set aside $150,000, invested the rest of it - $850,000 - in the next deal and was doing the happy dance!
That is until he discovered that he couldnt' take capital gains tax rate because he was subject to AMT. That meant he owed 28% of $1,000,000 or $280,000.
Reg Inc Tax: $150,000 AMT: $280,000
******
If you're making taxable income from your real estate holds, Cat Man Du, you are absolutely right. Doesn't matter because it's all income anyway. it's when you get the tax breaks that you have to be careful with AMT - losses don't go against gains like you think they would and you lose deductions.
Let me run through a couple of scenarios:
Let's say you have taxable income of $150,000 (after your itemized deductions, exemptions, etc), but you know you have $50,000 of real estate passive losses. And because you know all about Real Estate Professional status and that if you qualify (and you made sure either you or your spouse qualified) that you can take the full $50,000 of loss against the income. So, you only have to pay tax on $100,000. I'm going to guess (without looking at the table) that you'll pay about $20,000 in federal tax on that.
But you discover you're subject to AMT! That means you can NOT take the loss against your other income, so you now have $150,000 that is taxable!
And worse yet, it's subject to the flat rate of 28%! So you'll now how to pay $42,000! in taxes.
Reg income tax: $20,000 AMT: $42,000
But, if we can prove that the real estate loss came because you were a real estate dealer, then it's a business. Because it's a loss there is no self-employment tax, and you're back paying tax only on $100,000.
****
Scenario #2
Real life example:
A guy hit it big on a property sale, quit his job, made sure he had no other income so he could only pay the long-term capital gains rate of 15% on his $1,000,000 gain on the property.
He set aside $150,000, invested the rest of it - $850,000 - in the next deal and was doing the happy dance!
That is until he discovered that he couldnt' take capital gains tax rate because he was subject to AMT. That meant he owed 28% of $1,000,000 or $280,000.
Reg Inc Tax: $150,000 AMT: $280,000
******
If you're making taxable income from your real estate holds, Cat Man Du, you are absolutely right. Doesn't matter because it's all income anyway. it's when you get the tax breaks that you have to be careful with AMT - losses don't go against gains like you think they would and you lose deductions.
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