Allowable tax deductions

[Fred Stevenson]

I'm an active investor, but I don't qualify as a professional REI. I'm trying to understand what types of business related expenses I can deduct. I have created an LLC that I will be using to buy my investment properties in.

If I take a trip somewhere to view investment properties, can I deduct those expenses from my earned income when I file? What if I bought a new computer and software to manage my investments?  Or are these expenses deductible only if I'm a real estate professional? 

Thanks. 

[Brandon Hall]

@Paul Ewing Simply calling yourself a business owner vs. investor will not allow you to qualify as a real estate professional. The IRS has stringent guidelines that must be met to be considered a RE Pro.

@Fred Stevenson Being an "Active" investor vs. a "Real Estate Professional" does not affect the treatment of your real estate expenses. If you replace a roof, both an active investor and real estate professional capitalize and depreciate that roof. For your examples, both an active investor and real estate professional would expense travel expenses and capitalize and depreciate the cost of the computer (generally). 

The difference between an active investor and real estate professional is the amount of tax losses you can deduct against your ordinary income. An active investor may deduct up to $25,000 of tax losses against ordinary income (assuming you meet Modified Adjusted Gross Income thresholds). A real estate professional will be able to deduct the full amount of tax losses against ordinary income since it is essentially that person's business.

Example: You own a apartment building and you have a tax loss of $30,000. The active investor will only be able to deduct $25,000 and will have to carry over the $5,000 tax loss into the future. The RE Pro may deduct the full $30,000. In this case, it will be more beneficial tax wise to be classified as an RE Pro.

Being an RE Pro becomes very helpful when you are married filing jointly because you can deduct your tax losses against your spouse's income.