If you don’t know the difference between “active” and “passive” investment in real estate, you could well be filing inaccurate tax returns. So when the IRS calls and says you own a pile of taxes and some very painful penalties, don’t be surprised.
If you are a passive investor you are limited to $25,000 maximum in deduction (filing jointly) regardless of the real estate “losses” generated by your investment property. An “active” investor has no such limit. If you don’t know if you are active or passive, chances are astronomical that you are passive and that your losses (tax write offs) are limited. They are also limited as to how they can be used to reduce your tax liability. You see, passive losses can only offset passive income. That means that your passive real estate loss cannot offset your salary, commissions or traditional incomes.
To be able to write off all of the real estate losses generated, you must be a real estate “Professional”. That means that you have to spend 750 hours a year in your real estate business activities, and be able to make that argument successfully.
However, there are different types of real estate oriented business that can provide an avenue for massive losses when others would be severely limited. That however is a topic for a future review. Good luck. If I can answer any questions please feel free to contact me.