Tax gifts for real estate owners

Is real estate still a good investment? As a landlord, sometimes dealing with busy tenants or unexpected repairs, you may wonder if it’s still worth it. Despite these headaches and the ongoing doom and gloom reported about real estate prices, owning investment real estate still offers a number of benefits. Buying property offers many favorable tax benefits, a way to generate income, multiply your personal investment allocation and in some cases, renter pays for your personal housing expenses.

As an investment owner, you can deduct many of the costs of running the property, including mortgage interest, property taxes, utilities and repairs. In addition to the actual costs incurred, property owners also benefit from a non-financial cost: depreciation.

Losses arising from rental activities are typically considered “operating losses” except by a real estate professional. These losses can be used to offset income from another real estate investment or other type of passive investment, such as in a private limited partnership. Restricted passive activity losses and credits are deferred until passive income is earned or until the asset is disposed of in a taxable transaction.

As with all good rules there are exceptions. Although “active activity” losses should, as a rule of thumb, be used to offset other passive activity income, there are additional tax benefits for low- or moderate-income families.

A real estate investor who makes less than $100,000 in gross income and is “actively involved” in the management of the rental property can use up to $25,000 in passive activity losses to offset income from wages or business.

This is one of the few tax shelters available to middle income taxpayers. And like any gift from the IRS, it comes with certain strings attached. In this case, starting at $100,000 AGI above certain income limits, the ability to use this passive tax deduction is reduced by $1 for every $2 of income until it is eliminated at $150,000 AGI.

The key to “active participation” is generally to participate in the management decisions made on the property. Choosing a color scheme or wallpaper? Are you evaluating bids for various contractors? Collecting rent? All can be considered part of the active participation of the property owner.

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