Chapter 31Tax Savings for Investors in Real Estate
Real estate investors may take advantage of the following tax benefits:
- Gains on the sale of investment property may be taxed at capital gain rates.
- Depreciation can provide a source of temporary tax-free income (31.1).
- Rental income can be used to offset passive losses Chapter 10.
- Tax-free exchanges make it possible to defer tax on exchanges of real estate held for investment (31.3).
However, real estate gains may be subject to the 3.8% net investment income tax (28.3).
Losses on real estate transactions may be subject to the following disadvantages:
- Rental losses may not be deductible from other income such as salary, interest, and dividends unless you qualify as a real estate professional or for the special $25,000 rental loss allowance under the passive loss rules Chapter 10.
- Compromises of mortgage liability may subject you to tax (31.10).
A foreclosure or repossession is treated as a sale on which you realize gain or loss. In addition, if you are personally liable on the loan and the amount of debt cancelled in the foreclosure exceeds the fair market value of the transferred property, you will owe tax on cancellation of debt income unless an exception is available (31.9).
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