Tax Breaks for Landlords (“Real-Estate Professionals”)

Great summation from the WSJ

In 2014, one or more filers of 392,000 returns claimed to be real-estate professionals, according the most recent data from the Internal Revenue Service. This total doesn’t include taxpayers earning $150,000 or less and who can deduct up to $25,000 of rental losses under different rules.

To qualify for this coveted status, real-estate professionals have to meet stringent requirements. For example, they must spend at least 750 hours a year on their rental-real-estate business, and the total hours must be more than half their business activity—making it difficult for someone with a full-time job to qualify. They also have to meet a further layer of detailed requirements.

Here is a rundown of breaks that often benefit those who are eligible:

*Depreciation. Shrewd owners select properties that are appreciating while writing off losses that are only on paper because the law assumes the buildings are deteriorating. This annual deduction is based on a life of 39 years for commercial properties and 27 1/2 years for residential ones. Depreciation is deductible even if the owner borrowed money to buy the building.

Real-estate buyers often hire specialists to prove that a large part of a building’s cost—sometimes more than 60%—is made up of elements that qualify for much faster write-offs. Experts say this yields larger paper losses sooner.

“The benefits are huge,” says Eve Dreyfuss, a CPA with Moss Adams in Campbell, Calif.

*Loss deductions. If there are more losses than income from rental properties because of write-offs for depreciation, interest and taxes, real-estate professionals can use them to offset other income from wages or investments.

On the pages of his 1995 return, for example, Donald Trump claimed $15.8 million of losses from ongoing rental real estate and other activities. This more than offset his $7.4 million of taxable interest income as well as his business income. Unused losses can be carried forward for later use.

By contrast, taxpayers with capital losses on investments can only use them against capital gains—not wages or interest income (above $3,000 a year).

*Tax deferral. Real-estate owners can defer taxes on the sale of rental properties by exchanging them for others in what’s known as a “like-kind” exchange. If the investor holds successor properties until death, capital-gains taxes are never owed.

*Other exemptions. If there is net income from rental properties, it isn’t subject to the 3.8% surtax on net investment income such as interest, dividends and capital gains. The threshold is $250,000 of income for couples and $200,000 for singles. In addition, rental income isn’t subject to Social Security and Medicare payroll taxes.

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