The tax code offers considerable tax incentives to real estate investors, but there are a few crucial tax hazards to be aware of.
Be more energetic. You cannot write off a present loss since deductions stemming from passive activities are often only allowed for the money generated by those activities. Buying and selling real estate is always considered a passive activity. However, if you actively engage in real estate activities, you may utilize up to $25,000 of loss to offset non-passive income. For modified adjusted gross income (MAGI) between $100,000 and $150,000, the $25,000 real estate loss offset is tapered out.
Change over with quick. You typically must pay capital gains tax, up to a maximum rate of 20% on long-term capital gains, if you sell investment real estate. However, by swapping the property for another real estate of a comparable sort, you can postpone paying taxes indefinitely. This tax advantage for like-kind exchanges was removed by the Tax Cuts and Jobs Act (TCJA), although it was left in place for real estate. Caution: You must: (1) locate the replacement property within 45 days of the transfer; and (2) acquire title to the replacement property no later than 180 days after the transfer, excluding extensions.
Are you an expert? Generally speaking, you are not permitted to deduct losses from real estate activities under the passive activity loss (PAL) rules. But if you meet the requirements to be a real estate professional, there is no such restriction. Notably, you must log more than 750 hours at the activity and devote at least 50% of your personal services time to real estate. New instance, A couple claimed significant real estate losses, but neither could prove from the records that the other satisfied the tax law test in its entirety. The losses were therefore disallowed (Dunn, TC Memo 2022–112, 11/29/22).
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