The No. 1 expense for most people is taxes.  Many people think it’s income tax, but for most Americans their highest tax is Social Security.

As an employee, it appears as if the Social Security tax combined with the Medicare tax rate is roughly 7.5%, but it’s really 15% since the employer cannot pay you.  Further, you still have to pay income tax on the amount deducted from your wages for Social Security tax, income you never receive because it was paid directly to Social Security through withholding.

Tax Advantages of Single-Family Investing

While an investor’s single-family home appreciates, increasing in value over the long run, the Internal Revenue Code (IRC) allows an annual phantom depreciation expense.  Remember, Congress creates the tax legislation.  Coincidentally, who owns large amounts of real estate?  The annual depreciation write-off allowed for a single-family home is approximately $3,000 which largely offsets cash flow thrown off by the property, resulting in tax free passive income.

Professional Real Estate Investor Designation

Generally, an individual’s passive losses which can be used against non-passive income are limited to $25,000 per year.  However, if a taxpayer’s adjusted gross income (AGI) exceeds $100,000, the amount deductible in the current year is reduced by 50% of every dollar of AGI over $100,000.  Once a taxpayer’s AGI reaches $150,000, no current loss deduction is allowed.

If your spouse is a professional real estate investor, however, all of your phantom tax losses on schedule E due to depreciation, etc. can be detailed on his or her schedule C as actual losses incurred in her business.  These losses can then be used to offset your earned income, thereby dramatically reducing your taxes.  To recap, as your husband or wife is a professional investor, any passive loss limitation or phase-out no longer applies because he or she is an active real estate investor.  His or her business activities effectively monetize the phantom losses from rental properties.  Be mindful that there are stringent mandatory IRC requirements that must be met prior to claiming this status.

AFFILIATED WITH GREAT REAL ESTATE, INC.

Tax Strategies