As previously stated if
you have any passive activity losses (PAL) on your real estate, then they can
only be used to shelter passive income generating investments. In other words, you cannot use your losses
against any earned income or portfolio income.
So where does one look to find Passive Income Generating investments?
Here are two approaches.
Real Estate Funds
This is a collection of
diversified properties structured like an LLC or Limited Partnership. These real estate funds generate distributions
that is classified by the IRS as passive income.
Direct Property Purchases
This second approach uses
the purchase of rental real estate.
Rental income from direct property purchase is considered passive. Investors can purchase entire properties as a
sole owner or they can purchase partial interests in properties as a Tenant In
Common (TIC) form of ownership.
What is the end result?
By investing in proven,
reliable real estate fund or property that creates a stable income (passive),
investors match this income against their losses and the end result creates
tax-advantaged income. This is done on a
Next I’ll show you an
actual example of how this works.