Passive Income and Tax Benefits From Rental Real Estate

July 28th, 2008 | stacey | Financial Freedom, Passive Income, Passive Income Opportunity

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To earn passive income, real estate is one of the most popular options. By owning and renting out real property, owners can make profits every months without performing additional work. Simply for having and maintaining real estate, property owners collect ongoing monthly checks from renters.

Because of this, rental properties are considered passive income. This also means some tax deductions may be possible because of the passive activity from your rental income properties. Many property owners do not live in rental properties so their deductive rental expenses may be more than their gross rental income. Rental losses may be limited to at risk rules as well as passive activity loss rules. According to Vicki H. Meyer, counsel to Thomas Howell Ferguson PA, “You carry any excess loss forward to the following year or years until used, or the losses may be fully deducted in the year you dispose of your entire interest in the activity in a fully taxable transaction. Therefore, losses limited by the passive loss rules are delayed, not denied.” Getting the deduction later can mean a lesser value.

Tom Ochsenschlager, vice president taxation of the American Institute of Certified Public Accountants, states, “You can only take deductions related to a passive activity to the extent of income from that activity but there are a couple of exceptions.” One of the exceptions is active participation in the rental activity with a possible deduction of up to $25,000 in excess of the rental income. This is phased out for every dollar adjusted gross income exceeds $100,000, phasing it out after $150,000. Ochsenschlager says about the term actively participate, “It’s rather vague. You don’t have to snake out drains, but you should do such things as approve tenants, rental terms, repairs, etc. ‘Active management’ might be a better phrase.”

Passive income makes it easier to reach financial freedom in many ways – including the possible tax deductions.