Perhaps one shouldnt be surprised that new real estate investors fall into the same tax traps again and again. Real estate burdens investorsespecially new investorswith some tricky tax accounting.
But just because some other newbie makes these mistakes, that doesnt mean you need to. You just need to know where the traps are so you avoid them. And here are the biggest real estate tax traps you dont want to fall into:
Tax Trap 1: Passive Loss Limitation
On paper at least, real estate often loses money. Even if the rent pays the mortgage and the operating expenses, the books still show a loss because you get to write off a portion of the purchase price through depreciation each year.
If a rental house that cost $275,000 breaks even on cash flow, for example, you might also get a $10,000 annual depreciation deduction. If your marginal tax rate is 28%, that depreciation should save you $2800 annually.
Sounds sweet, right? Well, it isor should be. Except that the U.S. Congress labeled real estate investment a passive activity and said that, except in a couple of special circumstances, you cant write off passive activity deductions...
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