Tax Gifts to Real Estate Owners

Is real estate still a good investment? As a landlord who is sometimes faced with rowdy tenants or unexpected repairs, you may be wondering whether or not it’s still worth it. Despite these headaches and continued pessimism about real estate prices, owning investment real estate still provides a number of benefits. Buying a property offers a number of favorable tax benefits, a way to generate income, diversify a personal investment allocation and, in some cases, have a tenant pay for their personal housing expenses.

As the owner of an investment property, you can deduct a large number of expenses related to the operation of the property, including mortgage interest, property taxes, utilities and repairs. In addition to the actual expenses incurred, homeowners also benefit from a valuable non-cash expense: depreciation.

Losses generated by rental activities are generally considered “passive activity losses”, with the exception of real estate professionals. These losses may be used to offset other passive income from another real estate investment or other type of passive investment, such as in a private limited partnership. Disallowed passive activity credits and losses are deferred until passive income is generated or property is disposed of in a taxable transaction.

Like all good rules, there are exceptions. Although “passive activity” losses by rule must be used to offset other passive activity income, there are additional tax benefits available to those who are low- or moderate-income households.

For those who have adjusted gross income below $100,000 and are “actively engaged” in the management of the rental property, a real estate investor may use up to $25,000 in losses from passive activities to offset non-passive income such as income from wages or a business.

This remains one of the few tax havens available to moderate-income taxpayers. And like any other gift from the IRS, it comes with certain conditions. In this case, the ability to use this passive activity loss exception is phased out above certain income thresholds starting at $100,000 AGI reduced by $1 for every $2 of income above the threshold until it is phased out at $150,000 AGI.

The key to “active participation” generally means getting involved in property management decisions. Choose the type of paint or wallpaper? Review bids for different contractors? Collect rent? All can be considered part of the active participation of the owner of the property.