Losses from investment real estate or rental property are passive by definition—unless you’re a real estate professional. Then you can deduct real estate activity losses in full. To qualify as a real estate professional, you must annually perform:
• More than 50% of your personal services in real property trades or businesses in which you materially participate, and
• More than 750 hours of service in these businesses during the year.
Each year stands on its own, and there are other nuances to be aware of. If you’re concerned you’ll fail either test and be stuck with passive losses, consider increasing your hours so you’ll meet the test.
Tax-deferral Strategies for Investment Property
It’s possible to divest yourself of appreciated investment real estate or rental property but defer the tax liability. Such strategies may, however, be risky from a tax perspective until there’s more certainty about future capital gains rates—if rates go up, tax deferral could be costly. So tread carefully if you’re considering a deferral strategy such as the following:
Installment sale. An installment sale allows you to defer gains by spreading them over several years as you receive the proceeds. Ordinary gain from certain depreciation recapture is recognized in the year of sale, even if no cash is received.
Sec. 1031 exchange. Also known as a “like-kind” exchange, this technique allows you to exchange one real estate investment property for another and defer paying tax on any gain until you sell the replacement property.
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Since 1999, Berrios & Associates, Inc. has been providing a distinctive mixture of leadership-knowledge, and customer service satisfying client needs in advisory, tax, and outsourcing. Serving a diverse client base from individuals and sole proprietors to private corporations with nationwide and international locations. In the domain of accounting firms, Berrios & Associates has engraved a distinctive business based on diverse solutions through the interpersonal relationship of corporate and personal tax, corporate back office support, and business growth advisory. The firm directs clients through their everyday operations to ensure they have the right business model in place to meet their business goals.