WHAT IS A REAL ESTATE PROFESSIONAL? PART II OF III…

Let’s take a deeper look into this. If you are a Real Estate Professional then you can take a deduction on your income tax returns for Bonus Depreciation up to the limits allowed by the Internal Revenue Code up to the current limit of $800,000 and that will go down on January 1, 2024, to $600K. That’s still one hell of a deduction and it will create a net operating loss that can be carried forward to offset all your income for years to come until it’s used up. And that reduction continues at 20% a year until 2027 when bonus depreciation is gone. If you are not a Real Estate Professional then your loss, your passive activity loss, is limited to $25,000 per year. A lot of people look at this and say that I have to be a Real Estate Professional and might just change their life to become one. That may not be too smart from an emotional standpoint or a family standpoint or a financial standpoint because, if you quit your day job to get into real estate, and either you don’t have the knowledge to do it full time to support your family, the Real Estate market goes stagnant due to the increases in the interest rate that we’ve all been seeing, than you’re in trouble. That may slow down the market but it’s not going to stop it. But a new investor will be affected a lot more that a seasoned investor because he may not know how to navigate through this time and he may not have the resources to make it through the higher interest rates, that will increase the monthly payments of the mortgage might just price him out of the market. Now, I’m going to give you the pot of gold at the end of the rainbow for the Real Estate Investor. It may not seem like a pot of gold, it may seem like a pot of silver or bronze, but it’s a very large income tax deduction or loss that WILL reduce your income taxes every year until you do become a Real Estate professional. If someone told me that I can take a deduction or a loss on my tax return of $25,000 every year for a long time, and I didn’t know about the Bonus Depreciation rules and I was a new investor, I would be happy for that deduction because it WILL save me income taxes for a long, long time. And, when you have more experience in investing in Real Estate the market will still be there to invest your money in. Also, when you sell that property, the one that you couldn't take more than the $25,000 passive activity loss every year and you have a capital gain and you still have not offset the whole passive activity loss against your other income, you CAN offset whatever passive activity loss still exists against the gain on the sale of that asset. That could be a HUGE advantage. The income tax laws in the United States are extremely complicated and there are so many questions that have to be asked and things that have to be taken into consideration, and I am just giving you a taste of what I know here. Remember that I have over 50 years' experience as a practicing Certified Public Accountant and that I STILL take continuing education classes in income taxes given to CPAs, so I know so, so much. Always ask a qualified CPA for advice when delving into anything having to do with income taxes and especially, income taxes having to do with real estate transactions.