Rental Properties & Real Estate Investors

Rental income is considered “passive”—but what happens when you lose money on a rental? Enter: the Passive Activity Loss (PAL) rules.

What Are Passive Activity Loss Rules?

Under IRS rules, losses from passive activities (like rentals) generally can’t offset non-passive income (like W-2 wages)—unless you meet certain exceptions.

Exceptions That Let You Deduct Losses:

1. Active Participation Test

   • You make management decisions, approve tenants, and set rental terms

   • If so, you may deduct up to $25,000 of rental losses against regular income

   • Phases out if your modified AGI is over $100,000
     
     

2. Real Estate Professional Exception

   • You work 750+ hours and over 50% of your working time in real estate activities

   • If you qualify, losses are not limited by the passive loss rules
     
     

Be Careful:

• These rules are complex.

• Improperly claimed losses are an IRS red flag.
  
  

Need to know if your rental losses are deductible this year? Contact Us

Rental properties come with tax benefits—if you know what to track. Here's a breakdown of what landlords can typically deduct:

Top Rental Property Tax Deductions:

• Mortgage interest

• Property taxes

• Insurance premiums

• Repairs and maintenance

• HOA fees

• Depreciation

• Advertising

• Legal and accounting fees

• Travel to and from the property
  
  

Depreciation Matters

You can deduct a portion of the building’s value each year, even if the property appreciates in market value. But you must recapture depreciation if you sell the property—so keep good records.

Bonus Tip:

• Capital improvements (like a new roof or HVAC system) must be depreciated over time, not deducted all at once.

Maximize your deductions by using clear records and a CPA who understands real estate.  Contact Us

Selling a rental property isn’t just a real estate transaction—it’s a taxable event. Here’s what to know before you close:

Tax Implications:

• Capital Gains Tax: You’ll pay tax on the profit from the sale, based on how long you held the property (long-term vs. short-term rates).

• Depreciation Recapture: Any depreciation you claimed over the years must be “recaptured” and taxed—typically at a flat 25%.

• State Taxes: Your state may tax gains, even if you live elsewhere.
  
  
  

Ways to Reduce Taxes:

• 1031 Exchange: Reinvest in a similar property and defer taxes

• Timing: Selling in a low-income year may help reduce the tax rate

• Track Your Basis: Include improvements, closing costs, and depreciation
  
  
  

• Selling? Contact Us to avoid tax surprises at closing.

Own commercial or residential rental property? A cost segregation study could accelerate depreciation and slash your tax bill.

What is Cost Segregation?

It’s a detailed analysis that breaks down your building’s components (flooring, lighting, HVAC, etc.) into shorter-lived assets—so you can depreciate them faster.

Potential Benefits:

• Immediate tax deductions (especially helpful after renovations or new purchases)

• Improved cash flow

• Works well with bonus depreciation (when applicable)
  
  

When It Makes Sense:

• Property value > $500,000

• New construction, major remodels, or recent purchases

• You expect consistent profitability or need a large deduction

These studies can generate tens of thousands in tax savings—but only when used strategically. Contact Us and we can help you evaluate if it’s worth it.