Investing in real estate is the only investment in which you can have a net positive cash flow and appreciation and still claim a loss on your taxes. The IRS has however set limits on this deduction. You can deduct no more then $25,000 of real estate losses per year on your tax return. This rule is limited further if your income is more then $100,000 per year and if you make more then $150,000 you generally cannot claim any losses on your real estate investments. The silver lining to that bit of potentially bad news is that the losses do get carried over year after year and can be taken when either, you sell the property or when your income is lower then the IRS limits mentioned above.
You may be wondering if there is a way to get around those limits set by the IRS and the answer is, Yes. If you qualify as a real estate professional you will not be limited to the $25,000 of losses per year. In fact, the limitation of an investor’s ability to utilize real estate losses to offset other taxable income is eliminated completely regardless of your income.
Now the big question, do you qualify as a real estate professional, and if not how can you make some strategic planning to become a real estate professional? The IRS rules for claiming real estate professional status requires that you meet two criteria, you must;
1.Spend more than half of the professional hours worked throughout the year must have been devoted to material participation in real estate activities.
2. Spend more than 750 hours per year materially participating in a real property trade or business.
The IRS defines a real property trade or business as any business that develops or redevelops, constructs or reconstructs, acquires, converts, rents or leases, manages or brokers real estate. Managing your own rentals does count. You must properly document the time you spend on real estate to claim this status.