Your Rental Losses Might Be Useless Unless You Know This IRS Rule

David Wiener: Imagine this. You buy a rental. You hire me to do your cost segregation study. We show you a beautiful six-figure paper loss. And then at tax time, CPA says, sorry, passive. You can't use it. Most investors ⁓ have idea whether they're truly active in the eyes of the IRS or just along for the ride. And that's one mistake that can cost them more than any vacancy or bad tenant ever will. So today on the tax strategy playbook, we're going to fix that. We're breaking down passive versus active real estate, it really takes to qualify as a real estate professional, how material participation works in the real world, and the rules that decide whether your losses get locked up or unlock serious tax savings. And I've got one of the sharpest real estate CPAs I know. Gabe Virdaru here to walk us through it step by step. back to the tax strategy playbook. I'm your host David Wiener I am a cost segregation professional along with 179 D and R&D tax studies Gabe, I'd like to welcome you to the show. You are the founder ⁓ CPA. You with over 300 investors on tax strategy, asset protection, and real estate planning. Thanks for joining us. This is a complicated issue.

Gabriel Virdaru: Absolutely. Thank you for having me.

David Wiener: So passive versus active. Can you just plain English kind of define for the listeners what that is?

Gabriel Virdaru: Absolutely, I think that's an important place to start and an important concept to grasp. the main takeaway here is that ⁓ income is classified into one of two buckets in the eyes of the IRS. Like you said, there's passive and non-passive, also known as active, right, synonymous terms. But on the non-passive side, the straightforward ones, the easy ones, start understand W-2 income, right, if you're full-time employed as a W-2. ⁓ employee that's going be non-passive. If you're a business owner, you're running your own business in whatever industry there may be, that's going to be non-passive or active. Going a little bit deeper is where people start getting tripped up. Portfolio income, interest, dividends, sales stock is actually also active. Logically, think about it, you might expect it to be passive, right? Because practically speaking, it is. You make an investment, you get a return. IRS doesn't see it that way. It is classified as non-passive. Retirement account distributions as well, like if you're drawing on your 401k ⁓ later on in life or even earlier, that is considered non-passive. that encapsulates the majority of active income, maybe with a few exceptions. On the passive side, rental real traditionally speaking, and know, the big... item of interest for the audience here, I imagine, is considered passive. If you're, and one example, I'll give before I pause, ⁓ if ⁓ a passive investor in a business, right, you're just bringing capital, but you're not actually involved in the operations of the business, that is also considered passive.

David Wiener: ⁓ Do you find that there are misconceptions in a lot of people about what is passive and what is active or they come to you and they don't even really understand the difference?

Gabriel Virdaru: Great question. The latter, I'd say most people don't understand the difference and when they do start thinking about it, it goes back to something I said earlier. They make assumption that their portfolio income, if they have a significant amount of money in a taxable brokerage account, they're under the assumption that that's passive because to them it is, right, compared to the work they put in ⁓ at their or their business and they are under the assumption Great. I have a nice investment account here. It's been not interest and dividends. I'll just go invest in some real estate. I'll use those losses from the real estate to offset the income that's being generated from my brokerage account. That is not the case. It is one of the biggest misconceptions. ⁓ who goes down the tax plan rabbit hole, think that's something they encounter early on, something important to clarify early on.

David Wiener: And it's really important for somebody, especially somebody who owns real estate, to do tax planning and tax strategy. I think you'd agree with that. So I laid out an illustration at the beginning. Somebody real estate, gets all excited about cost segregation. They do a cost segregation study. ⁓ you had anybody who's done that then come to you and you say, you use this?

Gabriel Virdaru: Yeah, in a few unfortunate instances, yes. And then to your point, that's why it is so important to do planning ahead of time so we avoid those unwelcome surprises. You go through the hard work of sourcing a specific investment property, doing all the work they need to do to get it ready, get it placed in service, get it rented out, screen tenants, improve the property. You maybe did a little bit of research yourself and you've... you find out about this wonderful thing known as a cost aggregation study, bonus depreciation, only to come to find that you can actually use the losses like you were expecting to. ⁓

David Wiener: And that's why I've heard that you ⁓ don't the tail wag the dog. If you're talking to a client, you actually help them in strategizing acquiring their real estate so that they can use it in a more significant way.

Gabriel Virdaru: Exactly that you want to handle that up front. think the best way I could put this is want to align the type of investor to the type of asset? That they're looking at in the level of participation that they're open to Engaging in in ⁓ order to that specific investment appropriately

David Wiener: there are ways of making real estate active. So let's talk a little bit about ways of making real estate active or ways to realize that your real estate is active. Talk a little bit about ⁓ the real professional designation with the IRS. You know, I've had a lot of people who've said to me, ⁓ yeah, I sell real estate. I qualify. That's necessarily true. So talk a little bit about the tests that you have to kind of go through to determine whether or not you actually do qualify as a real estate professional in the eyes of the IRS.

Gabriel Virdaru: Absolutely. Yeah, it's one of the most ⁓ powerful tax strategies and also one of the most as well. Before I get to the specifics of answering that question, I also think it's important to mention that if you do have passive losses and excessive passive income, going back to our example ⁓ at beginning of the investor that found out that they can't use the cost seg losses. ⁓ Passive losses can offset passive income if you have passive losses in excess of passive income they get suspended and carried forward. So you do get to utilize them at some point. want to mention that as a starting point but to answer your question

David Wiener: Yeah, and we definitely want to talk about that as we go forward.

Gabriel Virdaru: Sure, we can go through examples of how we can do that. But to answer your question specifically regarding real estate professional status, it is one of the main ways that we can re-characterize what would normally be passive rental losses, flip them over to the active side, and use those paper losses, use that wonderful bonus appreciation from the cost side that you did against your active income. To your point, there are some specific rules that we need to meet. So to put it simply, step one. Test one is that you need to spend 750 hours in the real property trade or business more than half your time Okay, so More half your time puts simply means if you are someone that is a full-time w-2 employee Generally speaking you are not going to be able to meet real say professional status. Common point of confusion that you correctly highlighted the 750 hours in real property trade business, right? There's 11 real property trades or businesses as defined by the IRAs to put him really into three simple buckets. I'll say there's development, right? If you're flipping properties, that's that's one bucket or developing new construction. you're working as a realtor, that's another bucket. And if you're managing properties either for yourself or other people, I'd say that's the that's the third main bucket. So. ⁓ In one of those buckets or multiple, right? This is where it could get a little complicated. This is where the planning becomes important. We need to accumulate 750 hours and we meet test one.

David Wiener: So is there any way for a W-2 earner to meet real estate professional status? And what if they have a spouse ⁓ that might meet

Gabriel Virdaru: Great questions. So two separate things there. Let's assume both spouses are W-2 and of them wants to go for reps. In general, I say no. We've seen a lot of tax court case examples where this has been unsuccessful. have been people who have argued that even though I'm employed full time and I'm getting paid for doing 40 hours of work, the nature of my job, the reality of my job is that I'm not working eight hours per day. So people have tried to prove it, but generally they have not been successful. So I would love to see that first exception, right? And see someone successfully prove it in a tax court. But generally speaking, ⁓ I'd say if you're full-time W-2, you're not gonna be able to it. deeper into tax planning that I do with clients specifically, if it's a situation where one spouse is in a well-compensated W-2 position, the other spouse, doesn't have full time employment and they have the capacity to and the interest to spend a significant amount of time in real estate, that is a phenomenal position to be in, right? Cause that spouse can meet reps, other spouses generating a bunch of income from whatever their occupation is. And we can use the losses at that point to offset the working spouse's wages.

David Wiener: they file jointly, correct?

Gabriel Virdaru: They have to be married filing a in that scenario.

David Wiener: So myths out there? I mean, ⁓ going to have to prove, should you be audited, you're going to have to prove that you spent 750 hours and that it's more than 50 % of your working hours. How do you prove that?

Gabriel Virdaru: Great question. with a time log, ⁓ with a detailed time log, which I'll get into, but the what you asked about miss, and this is what I've had people who came to me get tripped up on in the past. We only went over test one. So it's important to mention that there's, there's a second layer to REPS right? So test one is 750 hours and more than half your time. The second layer is that you need to materially participate in your own long-term rental portfolio. So. That means you should have some properties, right? They could be residential, they could be commercial, they could be single family homes, they could be multifamily, that doesn't really matter. You need to be accumulating material participation time within your rental portfolio. So you should be self-managing to some degree. The myths and the painful lessons that I've seen people have to learn is, let's just say you're a full-time realtor, right? You're getting 750 hours working as a realtor. It's more than half your time. Well, if we don't have rental properties at all, right, there's no benefit really from a tax perspective. Or if we have rental properties, but you're not the one managing them, you have them under third party management, that doesn't help you either. Because step two is material participation within your long term rental portfolio. There are seven different material participation tests for the purposes of our discussion here. If we're talking about reps, generally speaking, you'll need 500 hours of material participation. within your own portfolio.

David Wiener: Now refer to REPS that's the real estate professional designation, correct? Just to make sure for people who may not understand that.

Gabriel Virdaru: Correct. Sorry for using the acronym there. I'm so used to talking about it every day that ⁓ I have a habit shortening But yes, to be clear, real estate professional status, also known as reps, that's we're talking about there.

David Wiener: Would you say that filing with because you can elect real estate professional designation on your taxes if you can't prove it, that be a problem. Have you seen people who've done that and then paid later on when the IRS came to call?

Gabriel Virdaru: Yes, I have seen instances of that. I've had instances where new clients came to work with us. Maybe in the past worked with someone who wasn't too knowledgeable or the client just told them, ⁓ want to claim real estate professional status on my return, but they're a full-time W-2 employee. We've instances where we've encouraged clients to preemptively amend their returns and remove those non-passive losses. Because you're if you get audited, The burden of proof is on you as the taxpayer. think good way of putting it when it comes to the IRS, you are guilty until you prove yourself innocent. It's not like a court of law where you're innocent until proven guilty. ⁓

David Wiener: Kinda sounds backwards to me a little.

Gabriel Virdaru: It is, but that's what we see play out in these audits, right? It goes back to your question earlier. How does someone prove this? Well, it is on you to prove it is not on them to disprove it. So the way you prove it is you have to have ideally impeccable contemporaneous records of that time that you're claiming that you put in. So whenever we get a client shooting for this, we walk them thoroughly through, you know, another conversation we could have is what actually counts towards material participation. What kind of involvement are we looking at? ⁓ Perfect. So we can get into that, but it is on the taxpayer to prove it. So that could be on a simple Excel log. ⁓ have a template that we give to clients. It could be on a time tracking application like a clockified toggle. There are specific apps that cater to this. Our EPS tracker is one that I've seen people use. So whatever tool that allows it.

David Wiener: I definitely want to talk about that.

Gabriel Virdaru: kind of keep track of the time being to keep track of that's what you should be looking

David Wiener: I have a client and a friend who is in real estate, definitely a real estate professional, but he told me that the first year he claimed real estate professional status, he was and it caused the audit and he spent a year defending it. He won, no problem, because he had all the contemporary, contemporaneous records. But I've read court cases where the IRS has thrown a case out because the contemporaneous records weren't contemporaneous because the IRS claimed they were all written in the same pen color. They don't play.

Gabriel Virdaru: Yeah, that's a funny one. Not at all. Not at all. Which again, goes back to planning, doing things ahead of time rather than, and then the way audits work, you're going to get that examination later, you know, two to three years down the road, right? If you didn't keep track of your time. One thing is like, yeah, the IRS fighting it that is not contemporaneous. And also the other thing is, you know, how good is your memory? Really? Like, are you going to remember what you did on March 11th? 2026 when you're doing your time log in 2029, probably not. It's not going to be great.

David Wiener: Absolutely, Now, ⁓ talking the real estate professional status, with a rental, that's not required, right? Just the material participation. I know people call it the short-term rental loophole. I don't like that terminology because it's not really a loophole. ⁓ Explain that a little bit.

Gabriel Virdaru: Agreed. Yeah, 100%. I'm with you. I hate the use of the word loophole there because it implies that it's something, you know, that's maybe not completely, exactly, exactly. But this has actually been in the tax code for a while, right? So all of this stuff that we're talking about, passive activity, loss rules comes from section 469. That's where the real estate professional status criteria is housed. And within section 469,

David Wiener: Sneaky.

Gabriel Virdaru: there is a portion there that says you have a property with an average stay per guest of under seven days, it is no longer a rental activity. might sound a little weird, but practically speaking, what that means is that it is not subject to real estate professional status rules. When that written ⁓ way back it was a written, an intended for your traditional bed and breakfast type of places and ⁓ hotels. as well. The reason is kind of getting this loophole terminology is that Airbnb, Verbo, Booking.com, all these rental platforms became a thing and it just became a lot more accessible to your everyday investor. ⁓

David Wiener: That all happened before Airbnb VRBO existed, correct?

Gabriel Virdaru: Exactly. I believe 1986, I want to say, somewhere around there is when that iteration was written. So it's been around for a while, so 100 % with you.

David Wiener: It's hugely popular now I would say probably a good 30 % of the cost segregation studies that I'm doing for people are for short-term rentals because it's a great strategy for a W-2 earner.

Gabriel Virdaru: Exactly. Going back to our example, right? Like if you have two, both spouses or you're not married, right? And real estate professional status isn't attainable. And as I think we're kind of implying here with the criteria of real estate professional status, it's a lot of work, right? 750 hours. believe if you do it over 52 weeks a full year, comes out to about 14 and half hours a week. is almost, you know, at a minimum part-time job. Short-term rental strategies I'd like to call it lower hanging fruit from a tax perspective because we keep the average state for guests to under seven days and then we look at the material participation test specifically to that property or properties Like I mentioned earlier there are seven material participation tests the one we're ⁓ likely going to default to when it comes to short-term rental is 100 and more than any other individual if we meet that test activity is active, we can do that cost seg and we can take those losses against the W-2.

David Wiener: that leads to another question. somebody has, let's say they have a short-term rental and they're using a property management company, is it impossible for them to meet material participation?

Gabriel Virdaru: Great question. I wouldn't say impossible, but extremely difficult and it would significantly increase their audit risk. Because again, the test that we're likely defaulting to with one property is a hundred hours and more than any other individual. If you have a property manager in place, and we could get into this a lot deeper in terms of when are you acquiring data, what's the property manager coming into play, but broadly speaking, if you're engaging a property manager, they're going to be doing a lot of tasks that could tasks that count towards material participation. I think this is a good opportunity to go a little bit deeper into what constitutes material participation and what type of time that we're looking at. It's the best way I like to put it at a simple level is it's day to day activities and operations that make the property go right. It impacts the actual operations of the property. Anything that is maybe too easy or too good to be true, typically is too easy or too good to be true. So I always like to go over time that doesn't count because these, you know, when you're having these conversations with people, this is where their minds gravitate because it's the easiest pathway to get their hundred hours their mind. Right. So ⁓ big buckets of time that are generally disallowed travel. That's a big one. And it's kind of an eye opener for people.

David Wiener: That is disallowed.

Gabriel Virdaru: It is disallowed, travel time is disallowed for material participation purposes. People like investing in short-term rentals out of state. ⁓ lot of people from California will buy short-term rentals in markets. That's a good example. If you're flying out from California to let's say Florida or Tennessee, the time it takes you to get there, including time to get to the airport, time on the plane, time to your rental car and to get to the property, that does not count towards your 100-hour threshold. ⁓ So that's one big book that's disallowed. Another one that people gravitate towards, education and research hours do not count as material participation. We've seen them disallowed in court cases over and over again. So our podcast here today, if you're listening to this and learning more about the short-term rental strategy, you may think that, I can come to this towards my hundred hours on my current property or maybe a future property. Not the case. Again, it goes back to what I said in the beginning. We are looking for time that makes the property go. Does our conversation here today make your specific rental property go? The answer will always be no. So those are two of the main ones I'd like to kind of point out.

David Wiener: You're not saying though that somebody can't meet material participation with a remote property.

Gabriel Virdaru: They absolutely can. It's a great, great question there. And I see it done all the time. I'd actually venture to say that I see people do it remotely more often times than locally, just because of the nature of short-term rental markets. It is doable. So I'll give you maybe like a little case study example that I see play out over and over again of how it's doable. Going back to the example of someone purchasing an out-of-state property, there's a lot of... work that's associated with getting a short-term rental ready, right? The thing I always like to tell clients is you're getting into the hospitality business, not just a real estate investment, right? You're providing experience to people. So with that, you have to provide a furnished property that has absolutely everything that the guests could possibly need and amenities as well, generally speaking. Those ⁓ and those amenities need to be set up by someone, right? It's a twofold benefit if you do it yourself. One, you're saving money on paying someone else to do it. Two, that is a great example of material participation. let's a married couple flies out to their Florida short-term rental and they spend a weekend, maybe a long weekend, the Thursday to Sunday, working on that property sunup to sundown, because there's a lot of time ⁓ of required for that property and there are a lot of things that need to be done. That is a great way to get a bunch of material participation hours in a short time period.

David Wiener: Very good, I have a case, I believe, where people do use a property manager but they do it with material participation in mind. Keep track of what the manager does and what they do so that they meet the... and if they do hours it doesn't really matter, correct?

Gabriel Virdaru: Correct. hours I say is the holy grail of material precipitation because no one else's time matters. And that's what I was alluding to as well with the timing of the purchase, right? Because a lot of the time upfront will come on the set up. So if the investor is willing to dedicate their time to the set up and a purchase later in the year, conceivably that could work. just... Hesitate to flat out say yeah, you can meet material participation with the property manager You can in certain instances, but you want to be very careful how you structure it to your point if you're going down

David Wiener: And you have to plan ahead for that and make sure that you're keeping track of pretty much everything. there a lot of miscommunication between investors and CPAs when it comes to material participation?

Gabriel Virdaru: Yes, I'd say so. And a specific example is the short-term rental strategy. I've seen a lot of CPAs and preparers not familiar with the strategy. So kind of goes back to your example at the beginning, right? It adds additional layer. You as the investor educated yourself on the criteria that you need to meet for the short-term rental strategy. But if you're not proactive in working with your CPA or tax preparer, When they go prepare taxes, I've seen, know, preparers argue with clients, hey, you're not a real estate professional. We can't use these losses against your W-2 income because they're not familiar with the short-term rental strategy, which again is separate from real estate professional status in this case.

David Wiener: I've also run into plenty of CPAs in my years doing this that don't understand cost segregation. They don't understand bonus depreciation. They don't understand real estate in general. And so I'm constantly harping on my clients. If you're going to do this, you really need one, you needed to have tax strategy, not just tax preparation.

Gabriel Virdaru: Yeah.

David Wiener: Please don't be using TurboTax and trying to do it yourself. you you need to make sure it's somebody who has a background with real estate and thoroughly understands real estate and the ins and outs of that because there's a lot they could miss if they don't. ⁓ Am right?

Gabriel Virdaru: Okay. 100 perccent agree with all that you want to be proactive upfront you want to start the conversation as early as possible especially with your CPA or tax preparer and you want to work with someone that's knowledgeable because to be clear we're covering the surface level here there are there is a lot of nuance to each specific piece of these strategies and you could get tripped up on a nuance and not have the outcome that you want to have like For example, common questions that come up, I'll just list out a few off the top of my head. the short-term rental strategy, average stay per guest needs to be seven days. Well, how many stays do you need to establish an average, right? If you're dealing with a later year acquisition, is enough that I acquired a property and my intent is to treat it as a short-term rental or to rent it out as a short-term rental, but I didn't actually get any stays in the current year? The answer is no, it's not enough. Generally speaking, we need at least two stays in order to establish that average of under seven days.

David Wiener: This stays at fair market value, correct? ⁓ not something where if you put a property, you get a property ready by December the ⁓ and you get a couple of friends to pay you a buck and stay there over the weekend. You use that, right? I believe for a rental, as long as you have it advertised for rent, you can consider it placed in service. But not so with a short-term rental. That's really important and I'm glad you brought that up.

Gabriel Virdaru: Exactly. Yeah, that's just one specific example of a nuance. And even then to clarify, it could be considered placed in service if it's available to rent. But if you didn't get the stays, we're not qualifying under the short-term rental criteria. It could be placed in service, but it will be treated as a long-term rental, right? Because we didn't establish the average period of customer use. And to your point, because yes, I've seen this come up time and time again. In an ideal world, are legitimate stays through a booking platform that you have support and history of. There's actually, you look in section, section two, 88, if you have a family member ⁓ a family member. that's going to be someone like a parent, a sibling, daughter, son, et cetera. If they rent the property from you, even if it's at fair market value, That's actually counted as a personal and you stay too if that's not their primary residence, which is short term rental is not. So that's another trip wire that I've seen come up and it's just of reiterates what you said. You want to get ahead of all this and plan it ahead of time or else you might walk into some of these unwelcome surprises.

David Wiener: you don't want those surprises in an audit. You want to know ahead of time so that you can provide for it, plan for it, and be ready. just a little bit about passive loss rules because if real is passive there's traps. There's opportunities but there's also traps. So how do the passive loss rules work?

Gabriel Virdaru: so going back to the at the beginning, and like you said, real estate is inherently passive. And let's pretend we're not applying with the real estate professional status or the short-term rental strategy. Then those losses will stay on the passive side. The way it works is they can passive income. So the most simple example of this I could give is, Rental property A has a $10,000 income after all expenses and depreciation. Rental property B has a $5,000 loss. We can use the $5,000 loss for rental property B to offset the income from rental property A and our net taxable income from those two combined properties is $5,000. That's the easy example. On the flip side, if rental property B has a $10,000 loss and rental property A has a $5,000 worth of income. That $5,000 excess loss, unless you qualify for the $25,000 allowance based on your income, which we could cover, if you're in a higher tax bracket, that loss is gonna be suspended and carried forward to the future.

David Wiener: So talk about the $25,000 allowance and how that works.

Gabriel Virdaru: Yep. that's if you're under a income threshold, if you make under a hundred K, you can use up to twenty five thousand dollars of rental losses against your active income. I believe 100 to 150 case the phase out range phases out one dollar for every two dollars of income. So at one hundred fifty thousand dollars, you are fully phased out from being able to use that twenty five thousand dollar allowance. It is the same threshold whether you're single or married, filing jointly. It's something that hasn't been adjusted for inflation in years, which is a little bit frustrating, maybe a conversation for another time. But yeah, if you're not in that threshold, if you're above that income threshold, I should say, can't use anything. You don't have any allowance. Everything gets suspended and carried forward.

David Wiener: So how is it carried forward? You can use that loss next year against passive income.

Gabriel Virdaru: Correct. So it gets carried forward on form 8582. One takeaway from this conversation we're having here, anyone that's listening to this that has rental properties and they're unsure of what's been reported in the past, take out your most recent file tax return, look at form 8582 and see what your suspended passive loss carried forward is. A lot of people don't know about that. They don't track it. It's an important number to be aware of because it does impact planning going forward. gets carried forward on form 85-82 and it ⁓ against future passive income. Some examples of that, the example is we have income from a rental property or if sell a property in your portfolio, ⁓ that is passive gain from disposition and those suspended passive losses can be unlocked at that point.

David Wiener: you can use it against the gain on a future sale.

Gabriel Virdaru: correct the future sale of a rental property.

David Wiener: Okay, but cost segregation cannot offset capital gains, correct?

Gabriel Virdaru: You could in that instance. if you. Yeah, in that sort of the passive gain from the sale of the property unlocks or passive losses. If you are in a position this this goes back to planning and strategy, you'd want to look at what your passive losses are and you want to estimate where your passive gain from the sale of the property will be and kind of see where we're at. If you have maybe I think this is where you're going with this.

David Wiener: In that instance, yeah.

Gabriel Virdaru: If you have another acquisition in that same year separate from the property that you sold, potential strategy would be to look at cost segregating that new acquisition and use the resulting loss to offset the gain on the one you sold. So it can be used the way it works though. This a common misconception. ⁓ Those passive losses actually go against your ordinary income. So the capital gain, ⁓ the of the property is what unlocks the passive loss. It's what allows you to use it, but it offsets your ordinary income. So you're sick. It's actually a strategy to look into. you're in the 37 % bracket, those suspended passive losses are offsetting income in the 37 % bracket, even though you might be paying 20 % capital gains on the actual sale. ⁓

David Wiener: So it becomes even better than a wash. That's great to hear.

Gabriel Virdaru: Exactly, exactly. Something that's oftentimes missed. But if you trace through the forms...

David Wiener: I try and educate when somebody comes to me for a cost segregation study and they don't understand it, I try and make sure that I ask those questions. Do you qualify for reps? Are you materially participating in the property? Because I think responsibly, I should not be trying to sell somebody a cost segregation study who isn't going to benefit from it. I can't be their CPA. I can't answer CPA questions, but I can make sure that If I offer them something, it's going to help them, at least to the best of my ability. Let's take a particular case, a hypothetical case. If somebody has, let's say, $100,000 paper loss, what happens if it's passive? What happens if it's non-passive?

Gabriel Virdaru: Mm-hmm. I'll take the more attractive one first if it's not passive, let's say you jump through the hoops of the short-term rental strategy that hundred thousand dollars offsets your active income dollar for dollar. So if you're making 250,000 dollars from your W-2 whether you're single or married filing jointly that hundred thousand dollars nets against your W-2 income. So rather than paying taxes on 250,000 dollars, we are now paying taxes on 150,000 dollars. All right, so We always look at the savings based on your marginal bracket. So if you're in the 24 % marginal federal marginal tax bracket, you're saving $25,000 in taxes net tax savings based on that hundred thousand dollars if it's in the non passive bucket great position to be in right That's why people about cost tax and bonus depreciation and 100 % bonus being back If you're on the passive side The first thing that happens is we look right, you're preparing the tax off where it looks. Do we have any passive income to net this against? If let's say we don't, that $100,000 carries forward on form 8582 of your tax return to the following tax year and it just sits there. In the next tax year, when your returns being prepared again, you look, do we have any passive income to offset this against? If we do, you can use some of it then. If not, it just continues to carry forward. until we do have some passive

David Wiener: ⁓ let's somebody buys ⁓ a in 2026, good for 100 % bonus depreciation, everything looks good, and they decide it's going to be a short-term rental. it'll apply to their W-2 income. They take it against their income, they file their taxes, they get the great tax benefit. What happens down the road if they decide to make it a long-term rental?

Gabriel Virdaru: Mm-hmm. Great question. Yeah. bit of nuance to that question. So ⁓ happens in terms of ⁓ depreciation is not recaptured once you make it a long term rental. It sits in the adjusted basis of the property. But the bigger question is what was your intent? That's where the audit risk lies. So your intent in running a as a short term rental, should be a genuine intent to generate a profit. by operating the property as a short-term rental where you could get in trouble if you're audited is if your intent was to just place it in service as short-term rental, use it against the W-2 income and immediately change it to a long-term rental afterwards, that's where the risk class. So that's what I've cautioned people if they're thinking about doing that.

David Wiener: So if you're putting a property into service in December, in January you don't want to change it into a long-term rental.

Gabriel Virdaru: Absolutely not. That's clear cut and dry. You want some long-term rental history. want a genuine intent as operating as a short-term rental. If you do ⁓ to being a long-term rental, you should have a great explanation of doing so other than, already got the tax benefit, I don't want to deal with it anymore. There should be a ⁓ or law passed ⁓ with specific... county or city that you can't run it as short-term rental anymore some other documented proof as to why you did that.

David Wiener: And there are a lot of communities now that are restricting and banning short-term rentals. I know I deal with a lot of properties in California, and there are certain areas where they just won't allow it anymore. So let's say I'm an investor. I have $100,000 to $300,000 worth of suspended loss. one two moves should they be discussing with their CPA or their tax strategist right away?

Gabriel Virdaru: Yep. Great question. The easiest one is can we generate some sort of passive income? That's much easier said than done. If it was that easy to do, everyone would do it, right? It really depends on also what your background is. I'll just throw out a random example here since we do a lot of work with physicians and doctors. If you're a physician or a doctor that's in that situation and you can invest in something like an ASC, an ambulatory surgery center, that's an investment that spits out a bunch of passive income, that would be a great strategy for someone in a position like that. But not everyone's in that position. So the answer that I would give here is I would take a good hard look at your portfolio overall, meaning each property that you own, look the metrics, run the number with your preparer, with your CPA, with your bookkeeper. What's the... ROI they are getting on these properties a great metric for this calculation or for this analysis return on equity How much of a return are you getting on the equity of in the properties that you own and when you run through that exercise? Sometimes the answer becomes clear if you have one that's a bit of a laggard. It's not really generating much It's more of a problem property, but we have a good amount of equity in it We could sell it and we could run an analysis on what the taxable gain is and we could see how much of those suspended passive losses we could tap into. That way we free up the capital in a tax-free manner. We're tapping into the suspended passive losses. Or also freeing up that equity that you weren't getting great return on for you to reinvest in another property or another investment that will generate a higher.

David Wiener: Fantastic. If a listener to the podcast only remembers one or two things you said, what are the most one or two most important things for them to remember?

Gabriel Virdaru: Yeah, great question. As a starting point, I think it's important for every taxpayer, every investor to have a very clear grasp on their income sources. So if there's one thing that you take away is kind of on paper, jot down what your income sources are, what your investment sources are, and you have a very clear understanding of what's in the passive bucket and what's in the non passive bucket. As a starting point, and then Assuming you're already a real estate investor already own some properties The other takeaway here is go look at your tax return look at form 8582 and see if you have any carried forward suspended passive losses They're both really important Exactly, and that will affect what the strategies

David Wiener: because they may not realize it. Give me a few steps that listeners should do to make sure they don't get surprised at tax time.

Gabriel Virdaru: Yeah, I say be proactive. If you have a CPA that you've been working with for a while, but you've kind of gone down a different path of investing in rental properties and real estate in general, up the conversation early, tell them what you want to do ⁓ see what the response is. ⁓ you going to get proactive support and are they willing to work with you ⁓ are ⁓ kind of getting some vague answers and getting brushed off? The earlier you up the conversation, the clearer your path becomes.

David Wiener: is the playbook after all. So we're kind of wrapping up here but I do have a question for you. In your life heard that were formerly a pro soccer player. How do you go from professional soccer player to Fortuna CPA?

Gabriel Virdaru: He's it. I getting that question. I always like to say it's the most ⁓ feet or of becoming a CPA is playing pro soccer when you were younger. ⁓ But ⁓ no, yeah, I was fortunate to have the opportunity to play soccer a little bit, played growing up my younger days, played a little bit in Eastern Europe, in Romania ⁓ after high school. then,

David Wiener: You

Gabriel Virdaru: goes without saying, didn't necessarily work out for the long term, still a great experience overall, but ended back up in school, in college, had no idea what I wanted to do at that point, thought I was gonna become an agent, funnily enough, of stay within the sports world, took introductory accounting class, took an introductory tax course, of got hooked ⁓ as as one can get hooked on ⁓ taxes and... and really went for there and through real estate investing on top of that and kind of found my niche at this point doing something that I generally enjoy doing in the tax world and in real estate.

David Wiener: So you mentioned working with doctors and physicians with Fortuna CPA. What clients do you serve?

Gabriel Virdaru: Yeah, I think anyone who has an interest in real estate, ⁓ people who maybe have been lacking planning or haven't had access to good planning in the past. you're a high income professional or if you're a business owner that has been investing in real estate or is interested in investing in real estate and on top of that is interested in coming up with a proactive tax strategy to implement using the real estate you require, those are the types of people that we're looking to work with. So we are very much advisory focused and planning focused. like being proactive and working with clients upfront, educating them and working hand in hand to create a plan that they could implement and have guidance through the implementation phase. That's what we specialize in.

David Wiener: I will put all of your contact information in the show notes so will be able to get in touch with you if they like, but what's the best way for them to get in touch with you?

Gabriel Virdaru: Yeah, I think that the best way if you're interested in having a conversation about becoming a client will be to go to our website, FortunaCPA.com. You'll see a link there to book a consultation. There'll be a simple form for you to fill out, kind of giving us some of your background. And then schedule a call and go from there.

David Wiener: that sounds great well Gabe I appreciate you being with me this is a this is a subject that comes up all the time passive versus active and how do you qualify and how do you know if you qualify and that sort of thing I think we have pretty much given them an area to work with and some questions to ask their own CPA I appreciate you joining me

Gabriel Virdaru: Absolutely, thank you so much for having me.

David Wiener: And you'd like to go back and review some of the things that we talked about, visit taxstrategyplaybook.com slash four and you'll find all of that including a one page PDF that you can use your own strategy and planning and determining whether your real estate is passive or active. If like to consider becoming a guest with me on the tax strategy playbook, go to taxstrategyplaybook.com/guest slash guest. if you're interested in further information about cost segregation, bonus depreciation, 179D or R &D studies, contact me directly. My contact information will be in there as well and I look forward to seeing you on the next episode of the Tax Strategy Playbook.