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<\/a>Are you worried about a real estate professional audit?<\/p>\nYou maybe should be if you’re using the real estate professional designation to sidestep the passive loss limitation rules…\u00a0The IRS sees a real estate professional audit as an easy win.<\/p>\n
Let me, therefore, briefly describe how the real estate professional designation works for tax purposes. And then let me explain how the IRS can pretty effectively strip this tax savings opportunity from you.<\/p>\n
The details are a little gritty. But understanding them can save you heartbreak and headaches.<\/p>\n
How the Real Estate Professional Designation Works<\/h2>\n
We need to start with an explanation as to why the real estate professional designation matters. And here that is.<\/p>\n
If your family income equals $100,000 or less, you can pretty easily put up to a $25,000 real estate loss deduction on your return. Further if your income falls between $100,000 and $150,000, you get to use a sliding scale chunk of that $25,000 allowance.<\/p>\n
If your tax return shows more than $150,000 of income, however, you typically lose your ability to use real estate losses to shelter other income.<\/p>\n
Say, for example, you\u2019ve purchased a rental property for $1,000,000 and it generates $70,000 a year of rents and $20,000 of operating expenses. That leaves you with a $50,000 operating profit. Which is good.<\/p>\n
But a property like this might also also burden you with $30,000 a year in mortgage interest And such a property might generate, say, about $30,000 in annual depreciation.<\/p>\n
On your tax return, then, the property generates a $10,000 loss as shown in the simple table below.<\/p>\n