Income from a business is generally considered nonpassive (some call it active) when you materially participate in the business.

Income from rental real state (long term rentals) is considered passive unless you are a "Real Estate Professional".  If you own a business OR have FT W2 job, there is no chance you are a real estate professional (ignoring a spouse who could be a REP).

Income or losses that flow into Irrevocable Trust for the benefit of someone that does not materially participate in a business venture is always considered passive. 

Thus - if we have losses from the real estate BUT income from the business, they will not "net together".  Why? The income character does not match! This creates large passive activity losses for some investors, while they have a large tax burden from there business.  Frustrating! 

The Solution:

What if we could convert the income character of SOME of your business income to match the character of the real estate losses that we can easily create through cost segregation studies? What if we could also gift a portion of your business out of your estate to the next generation?

A unique strategy exists where you could potentially shift a portion of your equity in your S Corp or Partnership to your children and also shift a portion of your equity in your real estate ventures to them as well.  

This is completed using an Irrevocable Children's Trust.

Let's examine an example:

Source	Amount	Notes
25% of S Corp Income Gifted to Trust	$100,000	ex - 25% of the business produces $100k in net income. This is shifted to the Trust as an owner who does not participate.
15% of Real Estate is Gifted to Trust	<$90,000>	ex - 15% of your buildings produce a tax loss of <$90k>
Business Owner Tax Savings	$27,000	Your previous unused RE loss is now netting against the S Corp income in the trust for your child. Your children are receiving $100k and paying a mere $2500 in taxes on it!
Taxable to Children's Trust	$2,500
Net Family Tax Savings	$25,000	In year 1, you have saved $25,000

• Each year, gift a % of the S Corp or Partnership to the Kids Trusts. This must be carefully thought out.  You can only perform this with a "pass through" business (no c corps).
• Gift a % of your real estate holdings to the Children's Trusts
• We perform advanced cost segregation studies on the building(s) or multiple properties
• The Kids Trusts receive K1s with Passive Activity Income for their % of Business Income
• The Kids Trusts receive K1s with PASSIVE LOSSES from the property after our Cost Segregation Studies
• The Losses and the Income NET since they are both passive in nature!
  • We have legally converted the "character" of your business income to passive, using an Irrevocable Trust for your Children
  • Must examine the relative amounts for both so we do not leave too much income in the trust
• Rinse and repeat!  It is best if more real estate is added to the Trust so there is always a "loss" source

As easy as we make this sound, this is certainly an advanced strategy that should not be taken lightly!  Why? These are irreversible moves that affect your business, real estate, estate profile and children.

We must coordinate with an estate planning attorney and possibly a real estate attorney to accomplish the steps.  However, in the right scenarios, this strategy has produced annual 6 figure tax savings for clients!