How Can I Deduct Real Estate Losses?


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Without a doubt, the question I get asked the most often about real estate has to do with real estate loss tax deductions.

 

First of all, I want to be clear. You shouldn’t buy real estate to have a loss. The idea is to buy real estate as an investment that produces cash flow. That’s one of the three benefits of real estate investments:

 

  • Cash Flow,
  • Appreciation (passive and active), and
  • Tax breaks.

 

You can offset your cash flow with depreciation. You shouldn’t ever have real estate income showing up on your tax return. If you do, you either don’t have enough basis in your property or you aren’t properly managing your depreciation strategy.

 

By the same token, you shouldn’t ever have suspended real estate losses. Again, that means you probably aren’t properly managing your depreciation strategy.

 

So what if you have real estate losses, have done what you can with your depreciation strategy and still can’t take a deduction.

 

One strategy is for you or your spouse (if you are married, filing jointly) qualify as a real estate professional.

 

If you are a real estate professional, you can take real estate paper losses against your income, no matter how much the losses are and no matter how much income you have.

 

There are three rules to being a real estate professional:

 

#1: You or your spouse individually must have 750 hours of real estate activities and more time spent in real estate than any other business or trade.

 

#2: You and your spouse must materially participate in the property. This means more than 500 hours per year, 100 hours and more than anyone else or more than all other people combined working on the property. You can combine hours with your spouse for this rule.

 

#3: Each property must qualify alone or you need to make a tax election to aggregate the properties. The downside of the aggregation is if you later sell a property at a loss, the loss can’t be taken against other income as it’s normally done. In the case of an aggregation, you have to suspend the loss until other properties in the group are sold.

 

Taking the real estate professional loophole can save you a lot of taxes, provided you do it right.

 

This is just one of the strategies that I help clients with. Want to know more? Give Richard a call at 888-592-4769.


4 Comments

  1. Diane Kennedy says:

    Tom,

    Yes, I suggest keeping a log of hours worked along with the detail of what they did. If you also have a business, you may need to keep an hourly log of that too, so you can prove you worked more in real estate than the business.

    Usually when you work for someone else, there is a presumption that you’re working 40 hours per week unless you can prove the hours you worked.

  2. Diane Kennedy says:

    Rene, you must pass all three points to be a real estate professional for tax purposes.

  3. Rene Lamar says:

    Are those three points to RE pro status all required? Or just one of them?

  4. Tom says:

    Great tips Diane!

    To qualify for 750 hours a year, would a person keep a log of their hours worked with details on what they did?

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