If you’re thinking of buying rental real estate while home prices are low, you’ll want to be aware of passive activity loss rules.

These federal tax laws are designed to prevent you from deducting losses from rental real estate activities against your income from other sources. That means when expenses you incur on a rental property exceed the rent you collect, you might not be able to use the loss to reduce income from wages, interest, or dividends — unless you qualify for an exception.

One exception lets you deduct up to $25,000 of rental real estate losses against other income.

To qualify, you have to “actively participate” in the rental activity. The term is important, because active participation differs from the usual rules that apply to rental real estate losses. As an example, there’s no specific time requirement. You can actively participate by making management decisions such as approving new tenants.

The $25,000 allowance starts to shrink when your modified adjusted gross income reaches $100,000, and disappears completely at $150,000.

Other tax rules may apply to your rental. Give us a call. We’ll help you analyze the tax impact.

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