How To Minimize Tax Losses On Your Rental Properties

If you have let out your property on rent in this economically fragile season, you might have faced tax losses. So how are you going to minimize the losses? Here are certain things that you can do.

If you are not already aware, the tax losses on the rented property are categorized under the PALs or passive activity losses. These tax losses are deductible only on your passive income which includes the rents that you collect on any other rental properties of yours. The PALs get invoked even if you sell off the rental properties. But if you are not selling any property at present or don’t have any other rental property from which you are actually making money, you cannot expect your PALs to be effective. You have to wait for that because they remain dormant till the conditions for activity are fulfilled. The PALs will be activated only when you sell the property and that might take a long time. So, there will still be some before you can actually minimize the tax losses on your rental properties.

But then, though the above mentioned condition is the general rule, there are a couple of exceptions that you can leverage to your advantage.

The first rule applies to active property owners. If your modified adjusted gross income (MAGI) does not exceed $100,000, you can expect to deduct tax losses upto $ 25,000 on the rental properties. This is regardless of your marital status. For availing this exemption, you should be an active participant of the rental activities. You should hold a 10 % stake and also should take part in activities like selecting tenants, signing the rental contracts, granting permission for repairs etc. In essence you have to be involved actively in the management of the estate. But you cannot avail this tax loss deduction in the proper limits, if you hire a management firm to take care of all the management activities of the property.

If the MAGI exceeds $100,000 but is within $150,000 you can expect you still avail the tax deductibles but they are phased across in periods. So if your MAGI is $125,000 you can deduct upto $12,500 which is half of $25,000. But if your MAGI is $150,000 or above, you no longer are eligible for this tax exemption program. You fall under the generic anti-tax category of the PAL.

The other exception applies to real estate professionals who have spent 750 hours an year on real estate work. They can claim deductibles on their PALs. You should be the person spending more time on your property than anyone else for availing the tax benefits. You should spend at least 500 hours on your own property. For qualifying for tax deductibles you qualify in material participation test. If you are renting out your property in a resort area, your tax losses are not considered pals.