First, thanks for all the info you guys provide in your channel. Couple of questions: 1. So does the capital gain income limits the amount of losses you can take? Such as a 150k capital gain from a sale can only unlock up to 150k in losses from that sold property and the currently bought property, which is cost segregated? 2. Can one use the short term rental loophole, convert the property to a long term rental and then sale it to unlock additional unused losses of that property plus a new long term property that is recently acquired?
I admit I was semi-distracted, but I did not have a light bulb moment where I understood what make this a "back door" REPS...I probably need a white board to illustrate it for me...i'll put this in my queue for re-watching
No problem! "Backdoor REPS" refers to the mechanics that turn passive losses into non-passive losses after selling a property. Here's how we came up with the name. 1. Rental losses are passive by default. 2. The Real Estate Professional Status (REPS) turns rental losses non-passive. 3. When a property is sold, passive losses become non-passive (i.e., on the backend of the transaction), which is what REPS does, too, usually on the front end, not on the back end. That's where the name "Backdoor REPS" came from. However, after additional consideration, we will likely not use the term moving forward because this overall strategy is very similar to one known as the "Lazy 1031 Exchange."
Came from the podcast to the video to leave a similar comment as @MD-jo9mh . I really like and appreciate all the content you guys share! But I got half way through the episode to the “so who is this strategy for?” and thought “wait, did I miss the actual strategy? What’s the trick?” As it stands, I’m left seeing that the strategy here is to take passive losses (that under ideal conditions would be used against income that’s being taxed at ordinary rates) and using them against income that’s taxed at lower cap gains rates, which sounds like the wrong kind of delta/arbitrage. Can you clarify?
@@JedWood Thanks for reaching out! The "Lazy 1031 exchange" is a popular strategy where investors sell one property and buy another to leverage current passive losses and/or losses from previous years to offset the gain on sale. But here’s the twist: when a property is sold, these passive losses turn non-passive and can offset ordinary income taxed up to 37%, not just capital gains taxed up to 20%. This creates an opportunity to save more by favorably arbitraging between these tax rates. The term "Backdoor REPS" was used to highlight this misunderstood aspect-how rental losses, typically passive without the real estate professional status (REPS), turn non-passive upon sale (i.e., on the back end of a transaction) and offset higher-taxed income - and opportunities where it may make sense to strategically capitalize on it. However, to avoid confusion, we're likely phasing out this term in favor of clarifying this dynamic during discussions of the Lazy 1031 strategy. Hope this makes sense. Let us know if you have any further questions :)
@@TheRealEstateCPA thanks for taking the time to reply! Can you walk me through a scenario? I buy Property A in 2021 for $100k. I end up with an accumulation of $20k of losses that have carried over. In 2024 I sell it for $125k. I also buy Property B in 2024, a long term rental, for $200k and do a cost seg that ends up giving me a $30k loss. Let’s say I also have $50k in ordinary income from day job. I assumed that the $20k losses in Property A offset the $25k of cap gains from that same property, leaving me with $5k cap gains. The $30k from the cost seg just carries forward into the future. Is that wrong? Is there some way to use those losses against my ordinary income?
@@JedWood No problem. When you sell Property A, the $20k of losses from Property A and $5k of losses from Property B (equal to the $25k gain on sale) would be "unlocked" and become non-passive. This $25k will offset your ordinary income from your job. You would then pay taxes on the $25k at capital gains rates, although a portion of that may be subject to recapture taxes. The remaining $25k from Property B would generally be carried forward. This dynamic, with passive losses being "unlocked" and becoming non-passive on sale and able to offset ordinary (e.g., W-2) income, is the main concept of the episode.
First, thanks for all the info you guys provide in your channel. Couple of questions:
1. So does the capital gain income limits the amount of losses you can take? Such as a 150k capital gain from a sale can only unlock up to 150k in losses from that sold property and the currently bought property, which is cost segregated?
2. Can one use the short term rental loophole, convert the property to a long term rental and then sale it to unlock additional unused losses of that property plus a new long term property that is recently acquired?
So, must the cap gain be a real estate investment capital gain, or can it be portfolio capital gains?
Must be from rental real estate.
I admit I was semi-distracted, but I did not have a light bulb moment where I understood what make this a "back door" REPS...I probably need a white board to illustrate it for me...i'll put this in my queue for re-watching
No problem!
"Backdoor REPS" refers to the mechanics that turn passive losses into non-passive losses after selling a property. Here's how we came up with the name.
1. Rental losses are passive by default.
2. The Real Estate Professional Status (REPS) turns rental losses non-passive.
3. When a property is sold, passive losses become non-passive (i.e., on the backend of the transaction), which is what REPS does, too, usually on the front end, not on the back end.
That's where the name "Backdoor REPS" came from.
However, after additional consideration, we will likely not use the term moving forward because this overall strategy is very similar to one known as the "Lazy 1031 Exchange."
Came from the podcast to the video to leave a similar comment as @MD-jo9mh . I really like and appreciate all the content you guys share! But I got half way through the episode to the “so who is this strategy for?” and thought “wait, did I miss the actual strategy? What’s the trick?”
As it stands, I’m left seeing that the strategy here is to take passive losses (that under ideal conditions would be used against income that’s being taxed at ordinary rates) and using them against income that’s taxed at lower cap gains rates, which sounds like the wrong kind of delta/arbitrage. Can you clarify?
@@JedWood Thanks for reaching out!
The "Lazy 1031 exchange" is a popular strategy where investors sell one property and buy another to leverage current passive losses and/or losses from previous years to offset the gain on sale.
But here’s the twist: when a property is sold, these passive losses turn non-passive and can offset ordinary income taxed up to 37%, not just capital gains taxed up to 20%. This creates an opportunity to save more by favorably arbitraging between these tax rates.
The term "Backdoor REPS" was used to highlight this misunderstood aspect-how rental losses, typically passive without the real estate professional status (REPS), turn non-passive upon sale (i.e., on the back end of a transaction) and offset higher-taxed income - and opportunities where it may make sense to strategically capitalize on it.
However, to avoid confusion, we're likely phasing out this term in favor of clarifying this dynamic during discussions of the Lazy 1031 strategy.
Hope this makes sense. Let us know if you have any further questions :)
@@TheRealEstateCPA thanks for taking the time to reply! Can you walk me through a scenario?
I buy Property A in 2021 for $100k. I end up with an accumulation of $20k of losses that have carried over. In 2024 I sell it for $125k. I also buy Property B in 2024, a long term rental, for $200k and do a cost seg that ends up giving me a $30k loss. Let’s say I also have $50k in ordinary income from day job. I assumed that the $20k losses in Property A offset the $25k of cap gains from that same property, leaving me with $5k cap gains. The $30k from the cost seg just carries forward into the future.
Is that wrong? Is there some way to use those losses against my ordinary income?
@@JedWood No problem.
When you sell Property A, the $20k of losses from Property A and $5k of losses from Property B (equal to the $25k gain on sale) would be "unlocked" and become non-passive. This $25k will offset your ordinary income from your job.
You would then pay taxes on the $25k at capital gains rates, although a portion of that may be subject to recapture taxes. The remaining $25k from Property B would generally be carried forward.
This dynamic, with passive losses being "unlocked" and becoming non-passive on sale and able to offset ordinary (e.g., W-2) income, is the main concept of the episode.