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Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. This episode discusses the difference between passive and non-passive income, and why it matters.

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When it comes to a real estate investment, the income generated can be defined as either passive or non-passive.

Passive income refers to income earned from any business activity where the investor does not materially participate in its creation. When a real estate investor invests in a real estate property, but has no substantial, hands-on, active participation in generating its income, that income is defined as ‘passive.’ Passive income comes from money that was invested in a property and was left to generate revenue; the earnings are regarded similarly to earnings from interest, dividends, royalties and bonds, though the tax rates differ.

On the flip side, when an investor materially participates in the day-to-day activities of managing a property – for example, collecting rents, managing tenants, advertising and maintenance – the income he generates is defined as ‘non-passive.’ Some other examples of non-passive income include wages, earnings from active stock trading and earnings from business activity.

Why is the difference between passive and non-passive income relevant?

Because the way your income is categorized impacts how it will be taxed.

Generally, the IRS does not allow a taxpayer to offset passive losses against non-passive income. Passive activity loss rules preclude a real estate owner from deducting losses generated from passive income (i.e. rental income) from non-passive income (i.e. business income).

However, when it comes to taxes, there are always some exceptions to the rule.

If a taxpayer qualifies as a real estate professional, as defined by IRC Sec. 469, the passive activity loss rules do not apply. The investor, or ‘real estate professional,’ can use the losses from real estate activities (like rentals) to offset ordinary and non-passive income.

In another caveat, if a taxpayer owns a piece of real estate and uses it for his own business (i.e. it is “owner occupied”), then real estate loss (passive) can offset the business’ ordinary income (non-passive).

The takeaway? It is essential for a real estate owner to correctly define his income as passive or non-passive in order to enjoy the greatest ROI.

This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.

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Complaining, officially defined as ‘the act of expressing dissatisfaction,’ is an essential aspect of any organization’s communication. When done ineffectively, complaining can hurt the collective mood, individual relationships and organizational culture. But when done effectively, complaining can help manage risks, provide early red flags, uncover opportunities for growth and change, and even improve relationships and well-being.

Part of being a business leader is handling your employees’ complaints. While some larger companies have extensive dispute resolution and arbitration procedures, informal procedures are often the best method for the small business owner where each situation is dealt with on a case-by-case basis. Whatever method your business uses, if an employee complains about an employment-related situation, as a business leader, you should be prepared to handle it in a fair and consistent manner.

When considering how to handle complaints, it is important to understand why employees complain, and when and how complaining can be constructive or destructive. Different types of complaints have different underlying intents. When faced with complaints from employees, start by identifying the type of complaint:

Productive Complaints

A productive complaint is made with the intention of improving an undesirable situation. Productive complaints can bring in valuable feedback necessary to change practices or behaviors that are harming the organization. Productive complaints are used to improve an organization’s processes, products and services on behalf of all employees and customers.

Venting

Venting is an emotional form of complaining where an individual expresses their dissatisfaction about someone or something to others. The typical intent behind venting is to release bottled-up stress or frustration. Research shows that venting can have a positive impact because it helps people process stress and frustration while increasing team bonding. While managers are often nervous about employees expressing negative feelings about their work, as long as it doesn’t become toxic, these complaints play a role in every organization.

Chronic Complaining

Chronic complaining is when a person seems to enjoy complaining about everything (the temperature, their salary, their manager, or even the elevator speed). Chronic complainers often have pessimistic views of their role, their work, and the world around them. While many of their complaints may seem frivolous, chronic complainers are very good at picking out serious red flags in an organization that others may miss.

Malicious Complaining

Malicious complaining is a destructive form of complaining that’s used to undermine colleagues or gain an unfair advantage. An employee’s own benefit, rather than dissatisfaction with an organizational issue, is the true intent in this form of complaining.

While understanding the intent of a complaint is important, an employer should also have a strategy on how to listen to and act on complaints when they are received. Here are some helpful steps to harness the benefits of a complaint:

Validate and show thanks

Whether an employee’s complaint seems valid or superficial, it’s always important to take it seriously. Showing your employees that you value and respect their concerns – no matter how big or small – increases the trust employees have in you. Thank the messenger for showing trust in you to address the issue. Despite the fact that the message may be wrapped in negative emotions like frustration or disappointment, the fact that an employee would come to you to share their concerns rather than venting to a coworker or friend, is positive.

Be Curious

Make sure you really understand the problem. Allow the employee to talk without interruption, then ask open-ended questions until you have a clear understanding of the facts. Be curious and consider the employee’s intention. Is the complaint intended to fix a problem? Does it offer an opportunity for positive change? Is it a red flag for a future issue? Is it something that several employees have previously mentioned? Is the person just trying to be heard by venting about an unsolvable situation?

Consider a time buffer

When appropriate (and if the complaint isn’t extremely serious), consider implementing a “time buffer” – a short pause to reflect on the grievance, its impact, and potential solutions before having a conversation about it. This gives the employee time to articulate concerns with less emotion, more effectively. It can also allow you to prepare resources and ideas for a response.

Involve the employee in the solution

Involving the employee in finding a solution means asking for their input, suggestions and preferences, and then considering different options and actions together. By involving the employee in finding a solution, you show respect and trust in their judgment, and you also increase their buy-in and commitment to the outcome.

Understanding why employees complain is an important step in handling the complaints themselves. Then, by better managing employee complaints, managers can create a positive, high-performing work environment while monitoring and containing the risks and costs associated with complaining. When employees feel that they are being treated with respect and fairness, they are more likely to accept the solutions you suggest, even if it is not exactly what they wanted or expected.

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Whether you’re starting up a not-for-profit organization or your nonprofit has existed for years, you may have questions about insurance. For starters: What kind do you need? How much? Are you required by your state or by grantmakers to carry certain coverage?

Much depends on your organization’s size, scope and programming. But your goal should be to carry what’s required to meet any regulatory or funding mandates and to address legitimate risks. Although there are many types of insurance available to nonprofits, it’s unlikely that you need all of them.

The essentials

One type of insurance you do need is a general liability policy for accidents and injuries suffered on your property by clients, volunteers, suppliers, visitors and anyone other than employees. Your state also likely mandates unemployment insurance as well as workers’ compensation coverage.

Property insurance that covers theft and damage to your buildings, furniture, fixtures, supplies and other physical assets is essential, too. When buying a property insurance policy, make sure it covers the replacement cost of assets, rather than their current market value (which is likely to be much lower).

Depending on your nonprofit’s operations and assets, you might want to consider such optional policies as automobile, product liability, fraud/employee dishonesty, business interruption, umbrella coverage, and directors and officers liability. Insurance also is available to cover risks associated with special events. Before purchasing a separate policy, however, check whether your nonprofit’s general liability insurance extends to special events.

Biggest threats

Because you’re likely to be working with a limited budget, prioritize the risks that pose the greatest threats. Then discuss with your financial and insurance advisors the kinds — and amounts — of coverage that will mitigate those risks.

Be careful not to assume insurance alone will address your nonprofit’s exposure. Your objective should be to never actually need insurance benefits. To that end, put in place internal controls and other risk-avoidance policies such as new employee orientations and ongoing training.

Don’t go overboard

Some organizations buy more insurance coverage than they need, which can be costly. Make sure you’ve thoroughly analyzed your nonprofit’s risks and buy only what’s necessary to protect people and assets.

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The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).

HSA fundamentals

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.

There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).

High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).

Advantages of HSAs

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.

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If you’re getting ready to retire, you’ll soon experience changes in your lifestyle and income sources that may have numerous tax implications.

Here’s a brief rundown of four tax and financial issues you may contend with when you retire:

Taking required minimum distributions

These are the minimum amounts you must withdraw from your retirement accounts. You generally must start taking withdrawals from your IRA, SEP, SIMPLE and other retirement plan accounts when you reach age 73 if you were age 72 after December 31, 2022. If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. Roth IRAs don’t require withdrawals until after the death of the owner.

You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from Roth accounts).

Selling your principal residence

Many retirees want to downsize to smaller homes. If you’re one of them and you have a gain from the sale of your principal residence, you may be able to exclude up to $250,000 of that gain from your income. If you file a joint return, you may be able to exclude up to $500,000.

To claim the exclusion, you must meet certain requirements. During a five-year period ending on the date of the sale, you must have owned the home and lived in it as your main home for at least two years.

If you’re thinking of selling your home, make sure you’ve identified all items that should be included in its basis, which can save you tax dollars.

Getting involved in new work activities

After retirement, many people continue to work as consultants or start new businesses. Here are some tax-related questions to ask if you’re launching a new venture:

Should it be a sole proprietorship, S corporation, C corporation, partnership or limited liability company?
Are you familiar with how to elect to amortize start-up expenditures and make payroll tax deposits?
Can you claim home office deductions?
How should you finance the business?

Taking Social Security benefits

If you continue to work, it may have an impact on your Social Security benefits. If you retire before reaching full Social Security retirement age (65 years of age for people born before 1938, rising to 67 years of age for people born after 1959) and the sum of your wages plus self-employment income is over the Social Security annual exempt amount ($21,240 for 2023), you must give back $1 of Social Security benefits for each $2 of excess earnings.

If you reach full retirement age this year, your benefits will be reduced $1 for every $3 you earn over a different annual limit ($56,520 in 2023) until the month you reach full retirement age. Then, your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn.

You may also have to pay federal (and possibly state) tax on your Social Security benefits. Depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on your tax return and pay the resulting federal income tax.

Tax planning is still important

There are many decisions to make after you retire. Speak to your financial advisor to help maximize the tax breaks you’re entitled to.

Video: Real Estate Right Now | Passive vs. Non-Passive Income

Handling Employee Complaints With Care

Nonprofits and Insurance: Getting it Just Right

The IRS has announced 2024 amounts for Health Savings Accounts

4 Tax Challenges You May Encounter When Retiring