Real estate can be a great way to both build wealth and shield the money you make from your investment from taxes. Of course the down side is, if you have a tax loss from your real estate investment, you can’t always use those losses especially against income you may receive from your job. You’re even further limited the more money you make and while the passive activity rules are complicated enough and a discussion for another time, one way to ensure your losses are utilized as quickly as possible is to qualify as a real estate professional. By qualifying as a real estate professional, you can usually take your losses in full and in the year you incur them. It’s not always easy to qualify, but there’s three rules that have to be met. As always, this is general information so be sure to talk to your tax adviser so he can opine on your particular situation. We’ll cover the first one here today and the other two in subsequent columns.
The first rule is that you have to spend 750 hours to rental property activities. I know I lead up to this and it’s one of the easier rules to understand, but you also have to be careful because in order to qualify as a rental activity, the average rent term has to be longer then a week. If it’s shorter, then the time doesn’t count. So if you have a short term rental property like a vacation home where you rent it out for six days and have a cleaning day, then you can’t count your time related to that activity.
Keep your eyes open for rule number two in the next couple of days.