rental property tax advantages

rental property tax advantages

What is property tax?

Property tax is an ad valorem tax that an owner of real estate or other property pays on the value of the thing taxed. The taxing authority performs or requires an appraisal of the value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

rental property tax advantages and disadvantages

It's generally not a good idea to invest in real estate if you're expecting losses. However, most financed real estate does result in a current loss for tax purposes, especially after annual depreciation deductions are claimed. The investor expects that the annual appreciation in value will exceed the current loss.

Unfortunately, with limited exception, real estate rental losses cannot be used to offset other types of income such as wages, interest, dividends and gains from investments other than rental real estate.

One exception to the loss deduction rule is for taxpayers that actively participate in the rental real estate activity and have modified adjusted gross income of less than $100,000. MAGI is your adjusted gross income (AGI) computed without regard to rental losses, individual retirement account deductions, taxable Social Security benefits and certain other adjustments explained in the instructions to Form 8582.

If your MAGI is less than $100,000, you can claim up to $25,000 in losses from active participation rental real estate. If MAGI is between $100,000 and $150,000, the $25,000 maximum is reduced by $1 for every $2 that your MAGI exceeds $100,000. For example if your MAGI is $140,000 you would reduce the $25,000 by $20,000 to claim up to a maximum of $5,000 in rental loss. In your case, you state that your income exceeds $150,000 so you will not be able to claim any loss. The limits are the same for single or joint filers.

Another limited exception exists for real estate professionals. The rental losses of real estate professionals are allowed fully against other income. A real estate professional is a person that spends more than 750 hours a year involved in the real estate business such as a property manager, Realtor, developer or substantial investor. If your wife became more involved in real estate, such as becoming a Realtor, you may be able to qualify for this break.

rental property tax advantages