Real Estate Professional Status

Owning rental property can be a great way to shelter income.

Elizabeth Carlassare
4-minute read
Episode #27

Today’s topic is a tax shelter for real estate professionals.

Owning rental property can be a great way to shelter income from Uncle Sam. Two episodes ago, I talked about how it’s possible to shelter a portion of your income from taxes with rental real estate losses, including paper losses from depreciation. In this episode, I want to explain how you can shelter even more of your income from taxes with real estate.

Are You Eligible?

To recap, as long as your modified adjusted gross income is $100,000 or less, you can deduct rental real estate losses of up to $25,000 from your earned income, whether you’re single or married and file jointly. To take the deduction, you must own at least 10% of the rental property and be responsible for significant decisions affecting it. If your income is higher, the deduction phases out: it’s reduced 50 cents for each dollar your modified adjusted gross income exceeds $100,000. For incomes above $150,000, the deduction is no longer available.

If you’re not eligible for the deduction, you don’t lose it. You can carry forward real estate investment losses indefinitely to future years. And, you can use them when your income falls to a level that makes you eligible or to offset your capital gain when you sell a rental property.

Is There an Exception?

But is there a way to deduct more than $25,000 in rental real estate losses from your other income? And, if you are not eligible to deduct rental real estate losses because your income is too high, is there an exception? The answer to both these questions is yes!

If you qualify as a “real estate professional” for the tax year, you are no longer limited to a maximum deduction of $25,000 in passive losses against your other income on your tax return. Instead, the deduction is unlimited. Let me repeat that: As a real estate professional, there is no limit to the amount of real estate losses you can deduct from your earned income.

If you do qualify as a real estate professional, you’ll want to keep a log of the time you’re spending on your real estate-related activities.