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Unlimited Tax Deductions For Pros

What makes real estate such a great tax shelter is the fact that real estate owners can deduct losses from rental properties (causing them to have a smaller tax bill) even when they are making a profit and there is no actual loss.

Property owners can deduct rental property losses against their regular income as long as their Adjusted Gross Income is less than $150,000. They can deduct up to $25,000 yearly if their AGI is less than $100,000.

AGI (Married Filing Joint): Less than $100K
Yearly Loss Deduction Limit: Deduct up to $25K

AGI (Married Filing Joint): $100K to $150K
Yearly Loss Deduction Limit: Deduct up to ($150,000 - AGI)/2

AGI (Married Filing Joint): More than $150K
Yearly Loss Deduction Limit: Deduct $0

If rental losses exceed the deduction limit, they are carried forward (up to 15 years) until they can be deducted in another year or offset with future rental income.

In other words, the loss that you can deduct is limited. The more you make, the less you can deduct - and if you and your spouse's combined AGI is more than $150,000 - you are unable to deduct the losses from your rental property.

"Real estate professionals" are not subject to this limitation. They can deduct unlimited losses against their income regardless of how much money they or their spouse earns. Many property owners at high tax brackets become real estate professionals so they can take advantage of unlimited loss deductions.

For example, a couple at a high income level cannot deduct rental losses because their AGI exceeds $150,000. However, over 50% of one spouse's time is spent managing the couple's real estate investments, and the total time spent throughout the year is greater than 750 hours. This qualifies the spouse as a "real estate professional," and allows for the couple to deduct unlimited rental losses against their income.

A person qualifies as a "real estate professional" by satisfying both of these conditions:

1. Throughout the tax year, more than 50% of the personal services performed by the individual were performed in real property trades or businesses in which the individual materially participated.
2. Throughout the tax year, more than 750 hours of the personal services performed by the individual were performed in real property trades or businesses in which the individual materially participated.

Keep in mind that the "real estate professional" status has been getting challenged by the IRS recently, and an increasing number of real estate agents are facing audits in the state of California.

Be sure to consult with a tax advisor to evaluate your specific circumstances.

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