Rental Property Real Estate Tax Deductions

Individuals who purchase real estate rental properties, who actively participate in the decision-making process, such as determining who the tenants will be and what repairs should be made, may be able to reduce their taxable income by up to $25,000 per year under existing tax laws. The active real estate investor may deduct up to $25,000 per year on schedule E for such items as depreciation, negative cash flow, maintenance, repairs, interest, taxes, and trips to the property. This could effectively reduce the investor’s taxable income by as much as $25,000. The potential savings in the 28% bracket would be $7,000. An investor in the 31% tax bracket would save $7,750. The savings would even be greater if the investor has a state income tax, as most state income taxes are based on the federal tax returns, which would be reduced also.

The $25,000 annual tax deduction is the maximum allowable each year no matter how many investment properties are owned; this amount is reduced for taxpayers who have over $100,000 in adjusted gross income. For every $2,000 over $100,000 of adjusted gross income, the $25,000 limit is reduced by $1,000. If, for example, the investor’s adjusted gross income was $110,000, he would only be entitled to a maximum of $20,000 per year. The entire $25,000 would be eliminated for the investor who has an adjusted gross income of $150,000. Hence, these investors would be buying the real estate investments for the potential appreciation and/or income which they can generate.