One of the many challenges for real estate investors in 2008 was the IRS’s ill-timed audit offensive against anyone with real estate losses. Early in 2008, we started getting rumors of audit teams targeting real estate investors who reported losses from real estate. They started in California, but then when they saw just how many returns they could extract gold from, they expanded the program.
If you had real estate investments that had losses in 2008, you’re now left with the question of how you’re going to report that loss when you file your tax returns. And more importantly, how you can do it to avoid the greatest possibility of IRS wrath.
If you make less than $100,000, you’re pretty clear. You can deduct up to $25,000 in losses against your other income. If you make more than $150,000, you can’t deduct anything. Between $100,000 and $150,000, the amount of loss phases out.
I’ve seen lots of people try things that just aren’t going to work to get around that rule. There is only one legal way. First, though, here are the things I’ve seen people do wrong:
- Disregard the income limitation and take the deduction anyway. Ignorance isn’t bliss here. Your return is almost guaranteed to be audited.
- Move the real estate loss over to a Schedule C (Sole Proprietorship). In some cases, real estate investments are considered trade or business, not real estate investing, but only in rare,e extreme cases.
- Run the real estate loss through a business return and net against active income. Can’t do that – passive is passive.
- Claim real estate professional status incorrectly.
This last one leads to the one way you CAN take the write off. If you are a real estate professional, working more hours in real estate activities than in any other acitvity and a minimum of 750 hours per year. PLUS you need to materially participate in the management of the properties to the tune of 500 hours per property. Yes, that’s right – 500 hours PER property, unless you make an election to aggregate the property. And I’ve seen about 1 out of 20 people have the proper aggregation election on their return.
There are dozens of other ways that this can go wrong – for example, holding your property in a Limited Partnership means the Real Estate Professional designation won’t help you.
If you’re facing real estate losses and want to know how to LEGALLY write them off, then you want to make sure that the IRS Survival Guide for Real Estate Professionals with Real Estate Investments is in your library.