ForeclosuresMD - ForeclosuresMass Monthly - Finance Corner

Purchasing real estate as investment property can provide you with some substantial tax savings. However, there are a few pitfalls to look out for in your process of acquiring investment property.

Some individuals can deduct up to $25,000 of rental real estate loss allowance in one year. If the property produces a paper loss after depreciation has been taken into account, the losses can offset other ordinary income on your tax return. Depending on your effective tax rates, you could be looking at a potential tax savings of up to $8,750 on your federal return alone. However, there are some limitations on the losses as follows:

* Next 37 17 investors only!

It is possible that the rental loss allowance will be waived under certain circumstances, such as qualifying for the classification of a real estate professional. To determine if you can be classified as a real estate professional in the IRS's eyes, you must meet two requirements every year:

Once established as a real estate professional, you must meet one of several criteria that define material participation in each rental activity. One example of these criteria is if the taxpayer participates in the activity on a regular, continuous and substantial basis during the year, and participates more than 100 hours.

The good news is that if the above requirements are met, the $25,000 rental loss allowance limitation does not apply to you!

Here are some of the items that can be claimed as a deduction to offset the rent you will receive on the property:

All of the above examples would apply to the portion of the property that was actually rented during the year.

Expenses can be limited on mixed-use property depending on the extent of personal use by the taxpayer. A basic example of mixed-use property is a vacation home that is used by the taxpayer personally and rented during the year as well. The key to the limitation of expenses is as follows:

In addition to the potential tax savings, another benefit of purchasing real estate is that you've acquired an appreciating asset to diversify your investment portfolio. As both a CPA and an Investment Advisor, I always like to see that combination!

Sonia M. Stingo CPA, PFS is a partner at Livingston & Haynes, a CPA firm located in Wellesley, Massachusetts. She has been in practice for over 16 years serving clients in real estate and various other industries. She can be contacted at sstingo@lh-cpa.com or 781-237-3339.

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