Tax Gifts to Real Estate Owners
Is real estate nevertheless a good investment? As a landlord dealing with sometimes rowdy tenants or unexpected repairs, you may surprise whether or not it’s nevertheless worth it. Despite these headaches and the current doom and gloom reported about real estate prices, owning investment real estate continues to provide a number of benefits. Buying a character offers a number of popular tax benefits, a way to generate income, diversify a personal investment allocation and in some situations have a tenant pay for your personal housing expenses.
As an investment character owner, you can deduct a large number of expenses connected with operating the character including mortgage interest, character taxes, utilities and repairs. Aside from actual expenses incurred, character owners also assistance from a valuable non-cash expense: depreciation.
Losses generated from rental activities are typically considered to be “passive activity losses” with an exception for real estate specialized. These losses can then be used to offset other passive income from another real estate investment or another kind of passive investment such as in a private limited partnership. Disallowed passive activity losses and credits are deferred until there is passive income generated or the character is disposed in a taxable transaction.
Like all good rules there are exceptions. Although “passive activity” losses by rule must be used to offset other passive activity income, there are additional tax benefits obtainable to those who are low- or middle income earning households.
For those who have modificated gross income below $100,000 and “actively participate” in the management of the rental character, a real estate investor may use up to $25,000 in passive activity losses to offset non-passive income like income from wages or a business.
This remains one of the few tax shelters obtainable to moderate income taxpayers. And like any other gift from the IRS, it comes with certain strings attached. In this case, the ability to use this passive activity loss exception phases out above certain income thresholds starting at $100,000 of AGI reduced $1 for every $2 of income above the threshold until deleted at $150,000 AGI.
The meaningful to “active participation” generally method involvement in management decisions about the character. Choosing the kind of paint or wallpaper? Reviewing bids for different contractors? Collecting the rent? All may be considered part of the active participation of the character owner.