Even Real Estate Professionals Can’t Deduct These Real Estate Losses

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Probably the most popular tax strategy for real estate investors is to become a real estate professional.  Why? The answer is simple. Because you get a huge tax advantage with the real estate professional status.  

What is a Real Estate Professional Status? 

Here’s how it works: If your adjusted gross income (AGI) is under $100,000, you can take up to $25,000 of passive real estate losses against your other income provided you have basis and are an active participant. (Look out for this! The IRS is coming down hard on “active participation”.) 
If your AGI is over $150,000, you can’t take any deduction for passive real estate losses. Between AGI of $100,000 and $150,000, the amount that is deductible phases out.  

The solution to overcoming that restriction is to be a real estate professional. However, you have 3 tests you MUST pass in order to be a real estate professional. Most people focus on the first test, 750+ hours of real estate activities and more hours in real estate activities than any other trade or business.  

But there are 2 other tests that are just as important. The second one, material participation, requires that you, as a real estate professional, actually participate in the management of the property.  

Real Estate Losses You Can’t Deduct 

Recently, some real estate investors got the bad news that they couldn’t get a deduction because they had set up their investments wrong. Here are some real-life examples of what went wrong:  

Invested as a limited partner in a partnership with real estate.  

By definition, a limited partner can’t participate in management. The general partner does that. That means that a real estate professional can’t take a deduction for losses as a limited partner.  

Invested in a time share.  

The IRS says that a time share loss cannot be deducted against other income. Period. It doesn’t matter how much the loss is or how much your AGI is. And it doesn’t matter if you are a real estate professional. No deduction.  

Invested in a trust that specifically did not allow you to participate in decisions.  

If the contract says you can’t be part of management, you do not have material participation and you don’t get the deduction.  

Held property inside an LLC that is set up without the real estate professional making decisions.  

In other words, the wrong type of LLC is set up and/or it is not properly executed. That’s why we talk so much about setting up the RIGHT KIND of LLC and making sure the minutes, resolutions and Operating Agreement are completed.  

Why Invest in Real Estate 

There are 3 reasons why it makes sense to invest in real estate 

 Cash Flow, 

Appreciation, and 

Tax breaks.  

The cash flow and appreciation don’t come automatically though. It takes the right buy and management to get those. And tax breaks don’t come automatically either. 
The more you know, the more you keep.
That’s why we have one day a month during the Wednesday Coaching classes devoted to real estate topics. More cash flow, better appreciation, less tax and strong asset protection. Those are the goals of a savvy real estate investor. 
Join us! 


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