Tax Guide: Tips for Real Estate Investors

Consider a like-kind exchange before selling property. Your tax liability from the sale of real property can be deferred if you exchange the property for similar property. If no cash or "boot" is paid as part of the transaction, your built-in gain from the old property will be carried over to new property.

Consider the long-term effect of making the election to aggregate for passive activities. Recent regulations have dealt with the election by real estate professionals to aggregate their rental real estate interests to meet the material participation standard and treat the activities as nonpassive, keeping the interests from being subject to the passive limitation on allowed losses. However, as many unsuspecting taxpayers have found out, it is important to remember that once the election to aggregate passive activities is made, the election is binding for all future years (unless a material change in circumstances occurs). The election is disadvantageous when, for example, a real estate investor owns both passive activities with losses that are not rental real estate and rental real estate activities that produce income. If the election is made in this situation, since the rental real estate income is considered nonpassive due to the election, this income cannot be used to offset the passive losses generated from the other activities.