Tax Deductions for Active Investor but not RE Professional

1 Reply

Hi,

I had couple of questions about tax deductions, and their calculations for my case. I stay in California. I am pretty sure my understanding on the topic is on shaky grounds, and would appreciate if the tax pros chime in with their opinion.

Me and my wife are employed full time with big corporations and have a triplex about 3 hours away. The triplex is held in a trust with all our assets and is managed by a property manager. On a typical year, our real estate incomes is between $2000-2500, after deducting depreciation and the travel costs to check out the property 2-3 times a year. So far it has been pretty straightforward.

Over the next 6-9 months, I am planning to get a RE license, and start actively visiting properties, talking to property managers, visiting courthouse auctions, researching properties online that are 1-2 hours drive away from me. There is a good chance my time spent on these activities will exceed 750 hours/year, but still be less than time spent on my primary job. I am assuming in this case, I do not quality as a real estate professional for tax purposes.

Will I be able to deduct the cost of RE license, travel to view properties, and other RE costs like title search, RE attorney consultation even if I dont end up buying a property. It is a legitimate RE expense, but not on any specific property. Or is it not tax deductible for me since I am not a real estate professional.

You can always deduct your expenses against the related income. I think you are trying to ask if you can deduct real estate losses against ordinary income.

Assuming you meet the IRS's activity rules and you are in fact an "active" participant, it really boils down to what your Modified Adjusted Gross Income (MAGI) is. You mentioned you  are married, and I am going to assume you file jointly. If this is the case and your MAGI exceeds $150,000, then you have exceeded the deductibility threshold and you won't be able to deduct  losses. You can however carry them forward indefinitely.

 If your MAGI is below $100,000, you can deduct up to $25,000 of real estate losses against your ordinary income. This is sometimes referred to as the "Mom and Pop" rule as it obviously helps limit ones tax liability. 

If your MAGI falls between $100 and 150k, then you may deduct 50% of the difference between the top threshold and your MAGI. Example: your MAGI is $120k. You may deduct $15k of real estate losses against your ordinary income ($150-120=30/2=15).

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