Sunday, June 1, 2008

Tax advantages of being a landlord

Did you know there are benefits to being a landlord beyond having to fix a tenant's plumbing at 3A.M.? There sure are. Landlords can receive numerous tax benefits including:

  • Deducting the mortgage and real estate taxes on a rental property
  • Deducting all operating expenses on a rental property
  • Depreciating a rental property over 27.5 years
There is a nice gotcha in the tax laws for landlords too. Something called passive activity loss rules.
If your property throws off a tax loss — and most do at least during the early years — things get complicated. The so-called passive activity loss, or PAL, rules will probably apply. The fundamental PAL concept is this: You can deduct passive losses only to the extent that you have passive income from other sources — like positive operating income from other rental properties or gains from selling them.
There are exceptions to the rules, but one of them is that adjusted gross income must be less than $100,000 (or under $150,000 to get a portion of the exception). Chances are that if you're mass affluent you won't pass this exception rule. The IRS has several articles and publications on passive activity losses.