Are You Active in Your Rental Real Estate?

[Tom Wheelwright]

Even if you have strong positive cash flow from your rental real estate, chances are you still have a loss for tax purposes due to the depreciation deduction.

This is a great tax strategy because your positive cash flow is sheltered from tax. But, it can be even better if you are able to take your losses against your other income (like your income from your job or the business that you run).

The general rule for rental real estate losses is that they are passive. This means they can only be taken against passive income. The income from your job and the business you run is active income so your rental losses cannot shelter this income. However, there are two exceptions to this rule.

Exception #1: "Active Real Estate" exception.

Exception #2: "Real Estate Professional" exception. (See my recent post about this).

The Background on the Active Real Estate Exception:

Rental real estate, in many cases, is held to provide financial security to individuals with moderate incomes. Because of this Congress believed that a rental real estate investment in which a taxpayer has significant responsibilities and which served a significant non-tax purpose should be treated differently than the activities meant to be limited under the passive loss provisions. So Congress created the active rental real estate exception.

- How It Works -

If you are active in your rental real estate activities you may be able to deduct up to $25,000 of your rental losses against other ordinary income. We say may be because there are income limitations which phase out the $25,000 deduction. The phase out will start when your adjusted gross income exceeds $100,000 and end when your adjusted gross income is at $150,000. This means that for every $2 over $100,000 of adjusted gross income you will lose $1 off the $25,000 deductible amount. For example if your adjusted gross income is $120,000 you will have to reduce the $25,000 exception by $10,000 and the most rental real estate losses you can deduct will be $15,000 for that tax year.

Don't let your high income penalize you! Learn my tax secrets to increase your cash flow by uncovering the hidden cash flow in your real estate. Several of my secrets reveal how to legally get around these income limitations!

What constitutes active participation?

Active participation exists so long as you participate, in the making of management decisions or arranging for others to provide services (such as repairs), in a significant and bona fide sense. Also, you must have at least a 10% interest in the activity at any time during the year. For more information about how to make the most out of your rental real estate, contact your Tax Coach.

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