email@example.com South Pierson Road Phone: (973) 996-2284Maplewood, NJ 07040 Fax: (646) 929-5562www.exactcpa.comRentals Frequently Asked Questions
Does owning a rental property offer any significant tax benefits?
Owning a rental property can have significant tax benefits. Like other business ventures, owners are ableto deduct the expenses related to their rental endeavor. There are two main issues surrounding theownership of rental property: passive loss limitations and future income tax rates. The passive losslimitation rules can limit the deductibility of expenses related to rental properties and should be exploredmore carefully.
What is the impact of the passive loss limitations rule?
Rental income is typically considered passive, meaning that you are not directly earning the income asyou would with a job. Passive losses may be deducted from non-passive income such as wages, but thereare limits. Passive loss limits max out at $25,000, and that number decreases as your gross incomeincreases. Specifically, passive loss reduces $1 for every $2 over $100,000 adjusted gross income, and by$150,000 (for married couples) the passive loss deduction is $0. If your rental losses are capped ordisallowed because of passive loss limits, that portion exceeding the passive loss limit is carried forward,aggregated and may be deducted in the year of disposal (sale).
What if I spend a significant portion of my time as a real estate professional?
If you are a real estate professional (materially participate more than 50% of your time and 750 hours peryear managing each rental activity), you can claim 100% of your losses and you are not capped bypassive loss limits. If you hire a management company you are almost guaranteed to NOT be considereda real estate professional. Please see, ” What is active participation versus material participation?” below,and how it affects your passive loss.Is depreciating my rental property beneficial to me for tax purposes? Yes, but there are some issues. Asmentioned in a previous frequently asked question, a large chunk of your rental losses can be due todepreciation. Generally speaking, a rental property is depreciated over 27.5 years, and only that portionattributed to the dwelling itself and not the land is depreciated.However, depreciation must be recaptured when you sell the asset the rental property. Your cost basis isessentially reduced by the amount of accumulated depreciation, increasing your subsequent gain on sale.Since you deducted depreciation as an expense every year during ownership, you cannot deduct theoriginal cost from your sale price to reach your taxable gain on sale. You cannot receive the benefit of the same deduction twice (once during the useful asset of the property and the second during the sale)Gains on recaptured depreciation is taxed at your ordinary tax rate up to 25% (Section 1250 gain), whilethe remaining gains are taxed at your capital gains rate