How To Understand Passive-Loss Real Estate Investing Rules

How To Understand Passive-Loss Real Estate Investing Rules

Investing in real estate can be very very good idea. In fact many people turn to real estate to fund a major portion of their personal retirement accounts because they just don't trust the volatility that comes with the stock market. Especially during recession times like we are facing today!

With real estate they get income in the form of rents, and they also get steady appreciation in the form of property price increases over time. These increases usually keep track with inflation or increase greater than inflation which makes them especially attractive for retirement type planning.

But there is one thing you have to understand when investing in real estate and that is the passive loss rules. Almost all rental real estate activity has been categorized by tax reformers as passive activity. What this means is that losses from those passive activities can only be used to offset passive activity income only. You generally can't use it to offset portfolio income such as interest or dividends or capital gains and you certainly can't use it to offset other income such as salaries and wages.

So what exactly does passive mean? Basically it means that the investor doesn't participate in managing the investment in a day-to-day manner. You aren't out there fixing broken plumbing or stoves in your rental houses, for instance. Your main job is to supply the money to buy the thing to begin with and that's pretty much all you have to worry about... that's what passive means.

There are some exceptions. If you ARE primarily managing rental real estate and you have adjusted gross income that is under $100,000 or so then some of your real estate income may be allowed to offset some of your non-passive income. This may have been phased out though by the time you read this article to be sure to check with your accountant or CPA or tax attorney before hand.

Of course, if you don't lose money on your investments; and really that's the goal anyway isn't it, then you don't have a whole lot to worry about when it comes to offsetting passive income losses and if you have most of your retirement income dragged into real estate then that probably means that you don't have significant stock market holdings which means you won't have much dividend income or capital gains income either so at some point this may be come a moot point to you but it's still something that you need to keep in mind and it's something that all real estate investors should be thoroughly schooled in before making any types of investments whatsoever.

Investing in real estate can be a fantastic way to save for your retirement. Just make sure you know all the tax rules backwards and forwards so that you don't get walloped by the big bad IRS...Because the last thing you want to do is spend your glorious retirement years arguing with the tax man during a yearly AUDIT! With a little careful planning, you can make sure that doesn't happen.

Article Source: http://www.articlesbase.com/real-estate-articles/how-to-understand-passiveloss-real-estate-investing-rules-1876641.html

Jason Markum has been an article writer online for the last 14 years. When he's not writing about investing, he has fun running a blue area rugs web site where he reviews large area rugs for whatever you can think of using them for.