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3 Costly Mistakes Real Estate Investor Make


Mistake #1: Not Understanding What Makes Real Estate Expenses Deductible 

If the property you purchase is to be used as your primary residence (or your home), then your deductions are limited to mortgage interest (subject to limitations), property taxes, points, and mortgage insurance protection (temporary law).

If you were to buy another house without renting it out, you may be able to treat it as a second home.  The deductions for a second home are limited to mortgage interest (subject to limitations) and property taxes.

Mistake #2: Buying a Rental for Tax Benefits without Considering Limitations

If you bought a rental property because you wanted to deduct rental losses against your other income in order to reduce your income taxes, then you may be disappointed.  The tax law contains passive-loss rules that limit deductions.

If you, the real estate investor, want to be able to deduct rental losses, you need to qualify as an “active participation” owner.  To be an active participation owner you must participate in the day-to-day management decisions of the property or properties, or be actively arranging for others to provide services (such as repairs).  Management decisions include such things as approving new tenants, deciding on rental terms, and approving capital or repair expenditures.

Mistake #3: Failing to Maximize Allowable Rental Losses

If you find yourself slightly over the income level that disqualifies you from benefiting from the full $25,000 loss, a little planning and restructuring can modify your income to put it in the range for you to qualify for the full $25,000 loss on your rental properties.  Or, if you are not able to take the full loss benefit, then perhaps you can modify your income enough to take a partial loss benefit.

You can benefit greatly if you are able to take the actions needed to reduce your modified adjusted income below $150,000 for a partial benefit, or preferably, reducing it to the $100,000 level to qualify for the full $25,000 income loss benefit.  This loss can be used to offset other ordinary income on your tax returns, thereby reducing your income taxes.

Randy Roth write more in a full article at Housing Sacramento Magazine https://housingsacramento.com/magazine/real-estate-investor-tax-mistakes



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