Plano TX – Loss Limitations for Real Estate Investors

In this week’s installment in our series of taxation and investing in Real Estate we will discuss allowable loss limitations on Real Estate Investments. Real Estate investing is well known as having the ability to generate non-cash losses that may be deductible against other income for the investor. A big issues for taxpayers who come into our Richardson TX tax office and are investors in rental real estate is in maximizing that deduction. Our goal is to help them stay compliant while maximizing their allowable deduction.

What Can I Deduct?
While the calculation for the profit or loss from real estate will remain pretty much the same no matter what category they fall into, the limitations on reporting losses may vary materially. Below is an overview of the three categories and the limitations on each.

  1. A Real Estate Professional who has Material Participation in the investment. Last week, we reviewed what a Real Estate Professional is but in general, they must perform 750+ hours of service during the year in real property trades or business, and, more than 50% of all personal service income for the year is in real property trades of business. For Material Participation in a specific investment, there are seven tests used to qualify the investor. If the investor qualifies as a Real Estate Professional with Material Participation in the Investment, they can deduct 100% if of losses against ordinary income. This is a huge benefit.
  2. Active Participation in Real Estate. For active participation:
    a. You must own = or > than 10% of the property,
    b. You must be involved in the management of that property. This can occur even if you have a property manager for the property.

    1. If the taxpayer meets the requirements, up to $25,000 of losses (depending Modified Adjusted Gross Income or MAGI) can be deducted against ordinary income. Any losses not deducted to the current year, roll forward to future years. Taxpayers while file MFS cannot take the deduction even if they lived together only one day. There are three phases of income that impact the deduction.  A full deduction is permitted if MAGI is less than $100k, no deduction is permitted in MAGI is greater than $150k, and the deduction is phased out at 50% of the excess income between $100k and $150k.
  3. Does Not Have Active Participation. No Loss deduction is permitted in the current year.

It is important to remember that any losses not taken in a year are not lost. They are rolled forward until they are either able to be taken or until the property is sold or disposed of.

Do you Need Help?
If you would like help from a firm that specializes in working with realtors and real estate investors, as well as helping those who have IRS problems solve their problems, please give us a call at (972) 821-1991 or send me an email at