Real Estate Professional Tax Loophole Closed

Real estate has always been a great way to reduce tax exposure since you can write off the interest payments. But, the value of real estate holdings as a tax shelter is quickly diminishing thanks for the alternative minimum tax (AMT). The same ruling has also closed a loophole that was popular with real estate professionals.

The old rule was: If you made under $100,000 adjusted gross income, you can deduct $25,000 in real estate losses; if you make over $150,000, you can’t deduct anything; in between, the deductible amount phases out. The major exception was for real estate professions, who were allowed to deduct all of their losses. Obviously, this led to thousands of people rushing to take the steps needed to legally qualify as real estate professionals.

The IRS is now reportedly cracking down on this mass exodus of professionals who are taking 100% of their real estate losses against their income – particularly in this difficult market where losses are plenty. The agents claim that because one of the requirements is that the real estate professional is “brokering” the deals, they must be a licensed broker. Previously, any real estate professional status qualified for such write-offs not just licensed brokers. Now, it appears that this is quickly changing ahead of substantial losses.

So, those who are taking these write offs may want to look into brokering requirements and licensing in order to protect themselves during any audits. And all real estate agents should beware – the IRS may be looking for you!

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