hi lee phillips here i'm an attorney and i dabble in taxes so let's talk about tax for a minute how
is rental income taxed well you can get rental income from the standard uh rent the place that
the guy lives in you can get rental income from renting equipment in your business and stuff
so what type of rental income do you have it's generally passive that means you can't uh if it's
a profit you claim it as a as a profit and it goes against your income if there's a loss and real
estate investors often have a loss even even some equipment rental stuff because you're depreciating
the rental property or you're depreciating the piece of equipment and it's generating a deduction
and that may be more than your rental income if it is more than your rental income then you have a
loss and that's a passive loss that loss cannot be taken over and offset against your ordinary income
or your non-passive income your w-2 that sort of thing so we have to keep our passive income
and our passive losses over here separate from our standard our ordinary income our non-passive
income whatever you want to call this okay so we've got our passive income in the form of
rents and rents are always going to be passive income basically
if there's a loss the loss is going to be passive and it can only be used to offset passive
income except there are a couple of ways that we can take our standard real estate
rents and losses the depreciation all this stuff over here and move it over to where we
can actually offset it against our w-2 income our ordinary income those two ways are one
you become a real estate professional in the old days prior to 1986 we could take all of our
passive losses generated through depreciation and offset against our rents if we had the
loss we could automatically take it over and offset our ordinary income
and the bigwigs in california and places that were making a fortune on their w-2s
were going out and paying a fortune for real estate they didn't care what the real estate cost
because they used the depreciation to offset their regular w-2 income
and so in 1986 the congress finally said no no no time out time out time out can't do this passive
stays over here in passive active over here in non-passive active areas but if i'm a real
estate professional and there are a lot of rules as to how you become a real estate professional
when the 1986 law passed basically what happened is the real estate lobby went to congress and said
hey wait a minute wait a minute we do real estate this is our business we should be able to claim
the depreciation we should be able to claim the expenses and everything else against our
ordinary income because it is our ordinary income it's our business
and congress said yeah okay so if you qualify as a real estate professional then suddenly your real
estate depreciation and losses and everything can be offset against your ordinary income
the other way that you can do that is with short-term rentals this airbnb stuff
that's coming up that everybody's cashing in on these days that is not considered a
real estate investment that's considered a business now there are a lot of rules associated
with how you qualify for a short-term rental only average stay under seven days you can't use it
for yourself more than fourteen all of these these rules but if you follow the rules then any income
and any losses any depreciation any expenses that you have in your short-term rental are not
considered passive they're considered business and that's non-passive standard ordinary income and
deductions and everything else so people are doing these short term rentals in order to
get the depreciation the tax benefits of real estate and real estate is a tax shelter guys
it's one of your big tax shelters but your accountant's never brought you in put his arm
around you said you know we need to teach you how to use your real estate as a tax shelter
they don't do that but you need to learn to use the real estate as a tax shelter
and you get the benefits of real estate in the tax shelter aspect but if it's short-term rental
that goes against your ordinary income your w-2 stuff so real estate
rental stuff equipment rental stuff all passive depreciation passive everything passive unless
you qualify as the real estate professional or it's a short-term rental then it comes over
into the standard income ordinary income bracket so this is lee phillips i'm just talking about
how you get your real estate or your rental income how it's taxed what you can do with it now don't
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don't forget to sign up for my 10 tax tips because our ultimate goal is to save you 20 on your taxes
and i think we can do that we'll teach you how to use your real estate as a tax shelter
so and your other tax shelter you know what it is it's your little business you need to learn your
to use your little business as a tax shelter too lee phillips
we'll keep talking about taxes and legal stuff and asset protection and all the rest of this stuff