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The tax pros and cons of rental properties


Dear Tax Talk,
My wife and I are interested in investing in rental properties. Aside from the appreciation value of the rentals, will I be able to deduct the rental losses against my income of more than $150,000 per year? If not, what about an LLC or having my wife run the business? She currently stays home with the children. -- Michael

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Dear Michael,
It's generally not a good idea to invest in real estate if you're expecting losses. However, most financed real estate does result in a current loss for tax purposes, especially after annual depreciation deductions are claimed. The investor expects that the annual appreciation in value will exceed the current loss.

Unfortunately, with limited exception, real estate rental losses cannot be used to offset other types of income such as wages, interest, dividends and gains from investments other than rental real estate.

One exception to the loss deduction rule is for taxpayers that actively participate in the rental real estate activity and have modified adjusted gross income of less than $100,000. MAGI is your adjusted gross income (AGI) computed without regard to rental losses, individual retirement account deductions, taxable Social Security benefits and certain other adjustments explained in the instructions to Form 8582.

If your MAGI is less than $100,000, you can claim up to $25,000 in losses from active participation rental real estate. If MAGI is between $100,000 and $150,000, the $25,000 maximum is reduced by $1 for every $2 that your MAGI exceeds $100,000. For example if your MAGI is $140,000 you would reduce the $25,000 by $20,000 to claim up to a maximum of $5,000 in rental loss. In your case, you state that your income exceeds $150,000 so you will not be able to claim any loss. The limits are the same for single or joint filers.

Another limited exception exists for real estate professionals. The rental losses of real estate professionals are allowed fully against other income. A real estate professional is a person that spends more than 750 hours a year involved in the real estate business such as a property manager, Realtor, developer or substantial investor. If your wife became more involved in real estate, such as becoming a Realtor, you may be able to qualify for this break.

-- Posted: Dec. 27, 2001




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