Real Estate Investments

Rental Losses for the Pros

Real estate professionals can deduct some rental real estate losses that might be lost by other investors. Generally, you are considered a real estate professional if you (or your spouse if you file jointly) spend more than half your business time dealing with real estate. This can include time spent on rental properties. Keep good records of your time and expenses.

Low-Income Housing Credit

If you are a real estate investor or builder, you can reduce your tax bill with the low-income housing tax credit. This annual credit applies to your qualified new low-income housing construction costs. The Protecting Americans from Tax Hikes Act of 2015 (PATH) made permanent the minimum low-income housing tax credit rate for nonfederally subsidized buildings, which allows a 9% low-income housing credit rate for those buildings.

The credit is granted for 10 consecutive years. Some or all of it can be taken against tax on any type of income, and the unused credit can be carried forward or carried back. For Federally subsidized construction, and for acquisition of existing housing, there is a similar credit.

Like-Kind Exchanges

Some people who own real estate for investment purposes are reluctant to sell the property because they may incur a large income tax liability on the realized gain. However, the property can be exchanged and the gain postponed (but not eliminated) under the like-kind exchange rules. To qualify as a like-kind exchange, the property received must also be real estate (land and/or buildings) intended for investment or income-producing purposes. Under the Tax Cuts and Jobs Act of 2017 the types of property eligible for a like-kind exchange are reduced. In 2019, only exchanges of real property, not personal property, will qualify for the tax benefits of deferring gain recognition by way of a like-kind exchange.

To defer gain on a like-kind exchange, you must identify one or more parcels of like property within 45 days and complete the exchange within 180 days after you relinquish your property, or by the due date of your tax return (including extensions), whichever comes first.

If you receive anything in addition to the property, such as cash, or if you are relieved of any liabilities, you must recognize the gain up to the value of this additional amount received. Any gain you defer reduces the basis of the replacement property by that amount. While you don't have to recognize the gain, you also cannot recognize any loss.

The like-kind exchange rules can also be used for property which is not real estate, such as equipment or vehicle trade-ins.

Consider a like-kind exchange to defer gain on the sale of business or investment property. However, don't use loss property in a like-kind exchange transaction. Instead, sell the old property outright, deduct the loss, and purchase the replacement property.