RE Business or RE Investment

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Did you get sold a bill of goods on your real estate property?

You might have heard that real estate investments are the best because they provide cash flow, appreciation and tax breaks.

The cash flow happens when you buy a property that you can rent for more than the costs. Some markets are easier than others for that.

There are two types of appreciation – active and passive. Active appreciation occurs when you fix up a property or change its use so it is more valuable. Passive appreciation happens when the whole market goes up.

Tax breaks, as taught by non-tax professionals who put on real estate seminars, means you never pay tax again.

Is that right?

Maybe. Probably not.

The issue is that the amount of real estate tax losses that you can take against your other income is limited based on your income. At the most, you’ll only write off $25,000 and that’s if your adjusted gross income is under $100,000.

And that’s where real estate investors get stuck. What now?

There may be a trick after all. If you have a real estate business instead of a real estate investment, you may be able to write off your losses.

A real estate business means that the rentals are short stay, usually an average of one week or less, and that there is some kind of substantial service provided. In other words, a motel is a real estate business and not a real estate investment. Many vacation properties also are real estate businesses and not real estate investments. The distinction is important! One means a big tax break and the other means you don’t have the tax break.

In a future blog, we’ll talk about the real estate professional status. That’s another way to take advantage of real estate losses against your other income.

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