tax pros and cons of rental properties
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.
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.
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.
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
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.