Is real estate still a good investment? As a landlord struggling with sometimes rowdy tenants or unexpected repairs, you might wonder if it’s still worth it. Despite these headaches and the ongoing pessimism reported about property prices, owning investment property continues to offer a number of benefits. Buying a property offers a number of favorable tax advantages, a way to generate income, diversify a personal investment allowance and, in some cases, have a tenant pay for your personal housing expenses.
As the owner of an investment property, you can deduct a host of expenses related to operating the property, including mortgage interest, property taxes, utilities, and repairs. Besides the actual expenses incurred, homeowners also benefit from a valuable non-monetary expense: depreciation.
Losses generated by rental activities are generally considered as “passive activity losses” with the exception of real estate professionals. These losses can then be used to offset other passive income from another real estate investment or another type of passive investment, such as in a private limited partnership. Disallowed passive activity losses and credits are deferred until passive income is generated or the property is disposed of in a taxable transaction.
Like all good rules, there are exceptions. Although “passive activity” losses per rule must be used to offset other income from passive activity, there are additional tax benefits available to those who are low or middle income households.
For those who have an adjusted gross income of less than $100,000 and are “actively involved” in the management of the rental property, a real estate investor can use up to $25,000 in passive business losses to offset non-passive income such as income from wages or a business.
This remains one of the few tax shelters available to low-income taxpayers. And like any other gift from the IRS, it comes with certain conditions. In this case, the ability to use this passive activity loss exception is phased out above certain income thresholds starting at $100,000 of AGI, reduced by $1 for every $2 of income above from the threshold until its elimination at $150,000 of AGI.
The key to “active participation” usually means involvement in management decisions affecting the property. Choose the type of paint or wallpaper? Examine the offers of different contractors? Collect the rent? Everything can be considered part of the active participation of the owner.