Tax Tip Tuesday: Real estate Investments and Taxes

Tax Tip Tuesday

Single family home? Vacation home? Townhome or Condo? Duplex?  Apartment building?  Commercial triple-net property?  Determining the type of rental to buy is usually where someone starts in the rental business. 

So let’s start with the basics.  You decide real estate is a good investment and purchase a property.  Your intent is to hold the property in anticipation that it will eventually appreciate in value, and you will make a nice profit.  But while you are awaiting the typical 10–20-years for the property to double in value (according to Housing Watch), you decide to rent it out to cover the expenses of the mortgage, insurance, taxes and maintenance. This, at least, is your over-arching plan.  But the devil is in the details. 

READ: Franklin County: Deed transfers April 20-26

Rental Income and deductions

You rent the house out at a fair market rental amount.  That rent is considered income.  The expenses for your rental include:  mortgage interest, real estate taxes, insurance, repairs and maintenance. Additional expenses include depreciation on the building and any capital improvements.  Frequently these expenses net a small loss of $3,000 to 5,000 for the year.

Now the rental loss is considered a passive loss according to IRS rules.  Normally a passive loss can only offset passive income, but a rental that you are actively participating in has an exception to that rule for the first $25,000 of loss.  This works out great for a property owner that has an overall income of $100,000 or less on their tax return.  They can deduct this loss against their other income, like W-2 income.

The problem happens when the property owner’s overall income is over $150,000 on the tax return.  Then the passive loss from the rental is not deductible against other income, like W-2 income, on the tax return.  In which case the property owner will need to carry the loss forward.  And the loss is carried forward until the property owner’s income drops or the property is sold at which time the property owner can deduct the losses.  This just does not seem logical to the average taxpayer, but isn’t that the standard logic (or seemingly illogic) when dealing with IRS?  Knowing how the IRS rules may effect you before buying a rental may have made a difference in your buying decisions.

There are several other rules for real estate investments that you should know before you started.  Be sure to read next week’s “Tax Tip Tuesday” article…for the rest of the story.  (Or at least more of the story!) 

But if you want to know all the ins and outs of investing in the real estate market, I invite you to attend “Real Estate Investing 101”.  It’s a one-day-only event featuring experts from the real estate investment field including a mortgage broker, a real estate agent, a settlement company, an insurance agent, a land lord association, a property management company, and of course, me, to explain the tax implications.

Real Estate Investing 101” is NOT a sales event! This is an interactive, informational, let’s-get-to-the-nitty-gritty kind of education based on the topics that most real estate investors need to know! Plus, the interactive format provides an opportunity for you to ask questions!

 “Real Estate Investing 101” will be held at the office of Saunders Tax & Accounting in Hagerstown, MD on Saturday, May 14, 2022, from 8 am until 1 pm.  The cost for this 5-hour workshop is $59 and includes a networking lunch.  Seating is limited, so be sure to register before the May 11th deadline if you are interested.  For additional information including a course agenda, visit