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Tax gift for real estate owners in 2023

Is real estate still a good investment? As a landlord dealing with sometimes noisy tenants or unexpected repairs, you may wonder whether or not it’s still worth it. Despite these headaches and the ongoing doom and gloom reported for real estate prices, owning investment real estate continues to offer a number of benefits.

Buying a property offers a number of favorable tax benefits, a way to generate income, diversify the distribution of a personal investment and in some cases pay a tenant for your personal housing expenses.

As an investment property owner, you can deduct a host of expenses associated with operating the property, including mortgage interest, property taxes, utilities and repairs. In addition to the actual expenses incurred, property owners also benefit from a valuable non-cash expense: depreciation.

Losses generated from rental activities are usually considered “passive activity losses” with an exception for 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 carried forward until passive income is generated or property is disposed of in a taxable transaction.

Like all good rules, there are exceptions. Although “passive activity” losses must normally be used to offset other passive activity income, there are additional tax benefits available to those in low- or moderate-income households.

For those with adjusted gross income below $100,000 and “actively participating” in the management of the rental property, a real estate investor can use up to $25,000 in passive activity losses to offset non-passive income such as income from wages or a business.

This remains one of the few tax shelters available to moderate income taxpayers. And like any other gift from the IRS, it comes with some strings attached. In this case, the ability to use this passive activity loss exclusion is eliminated above certain income thresholds starting at $100,000 of AGI, reduced by $1 for every $2 of income above the threshold until it is eliminated at $150,000 of AGI.

The key to “active participation” generally means being involved in management decisions about the property. Choosing the type of paint or wallpaper? Reviewing bids for different contractors? Rent collection? All can be considered part of the active participation of the property owner.

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