Real Estate Investments

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 detailed 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 credit is granted for ten 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 existing housing acquisition, there is a similar credit. The Tax Cuts and Jobs Act lowered the corporate tax rate from 35 to 21 percent, which impacts pricing for the housing credit and affordable housing production, but did retain the 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, 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 this tax treatment are reduced.

To defer gain on an exchange, you must identify one or more parcels as replacement property. The maximum number that you may identify is either three properties without regard to the fair market values, or any number of properties as long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all of the relinquished properties. You must identify the 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. Due to the Tax Cuts and Jobs Act, the like-kind exchange rules cannot be used for personal property, such as vehicle trade-ins unless one portion of the exchange was completed by December 31, 2017, and one portion remained open by that date.

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 do not have to recognize the gain, you also cannot recognize the 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, do not use loss property. Instead, sell the old property outright, deduct the loss, and then purchase the replacement property.